×

Oil prices rise more than 2% as traders cover short positions

  • Oil prices rose for a fourth consecutive session on Tuesday as investors covered short positions.
  • Worries over a persistent global supply glut still lingered as Nigeria and Libya raise oil production and fuel demand remains weak.
  • "Oil may be close to the bottom but badly damaged sentiment and a rising (U.S.) rig count will dent the recovery," Citi said.

Oil prices rose for a fourth consecutive session on Tuesday as investors covered short positions, although worries over a persistent global supply glut still lingered.

Brent crude futures, the international benchmark for oil prices, had gained $1.07, or 2.3 percent, to $46.90 per barrel by 10:51 a.m. ET (1451 GMT).

U.S. West Texas Intermediate (WTI) crude futures were up 91 cents, or 2.1 percent, at $44.29 per barrel.

The gains mean the market is up slightly so far this week, after spending much of the last month in negative territory.

"Short-term financial investors also significantly scaled back their net long positions in Brent on the ICE last week...and find themselves at their lowest level in a year and a half," Commerzbank said in a research note.

"Short positions have soared to a new record high, having increased more than four-fold since the beginning of the year."

The dollar fell 0.1 percent against a basket of six major currencies, propping up oil, ahead of a speech by U.S. Federal Reserve Chair Janet Yellen.

The Organization of the Petroleum Exporting Countries and its partners have been trying to reduce a global crude glut with production cuts. OPEC nations and 11 other exporters agreed in May to extend cuts of 1.8 million barrels per day (bpd) until March 2018.

Despite the cuts, which started in January, inventories have not fallen as expected, as U.S. producers and others outside the OPEC-led regime have boosted output.

Ian Taylor, head of the world's largest independent oil trader Vitol, told Reuters that Brent prices would stay in a range of $40-$55 a barrel for the next few quarters.

"In the third quarter we should draw (down stocks), but we are unsure about the fourth quarter as U.S. production is likely to have a year-end spurt," Taylor added.

OPEC delegates said the cartel will not rush into making a further cut in oil output or end some countries' exemptions from output limits, although a meeting in Russia next month is likely to consider further steps to support the market.

OPEC members Nigeria and Libya are exempt from the cuts and have raised production substantially while Iran has also been allowed a small increase to recover market share lost due to Western sanctions.

Meanwhile, U.S. shale oil output has risen about 10 percent since last year to 9.4 million bpd, with the number of U.S. oil rigs in operation at the highest in more than three years.

"Oil may be close to the bottom but badly damaged sentiment and a rising (U.S.) rig count will dent the recovery," U.S. bank Citi said on Tuesday.

Adding to the bearish supply outlook is an apparent glut in U.S. East Coast product supplies.

Colonial Pipeline said that demand on its main distillate line fell below capacity for the first time in nearly six years as the East Coast remained awash in fuel.

Analysts at Bank of America-Merrill Lynch said demand was not growing quickly enough to absorb output, especially since imports in Asia are stuttering.

A fuel glut in China, a hangover from demonetization in India, and an ageing, declining population in Japan are holding back crude oil demand growth in three of the world's top four oil buyers.