Oil rises towards US$59, supported by US drilling slowdown

[LONDON] Brent rose towards US$59 a barrel on Monday in a volatile market, continuing gains after a strong end to last week as financial traders increased bets on higher prices amid a slowdown in US drilling.

Front-month Brent crude futures were up 82 cents at US$58.69 a barrel by 0934 GMT, having earlier touched US$59.54. US crude had risen 78 cents to US$52.42 a barrel, after touching US$53.10.

"We found a bit of a momentum this morning," said Ole Hansen, head of commodity strategy at Saxo Bank. "The US rig count once again focused people's minds on the imminent reduction of production. The market's choosing to not focus on the ample supply we have at the moment."

Prices rose by more than a dollar between 0715 GMT and 0810 GMT on Monday, which was a result of traders covering short positions, said analysts.

"If the market rises a lot then a lot of short covers come into the market. It's the same when prices fall," said Ken Hasegawa, commodity sales manager at Newedge.

Speculators in US crude futures and options raised net long positions by 52 million barrels in the week to April 7, their biggest weekly rise since 2011, data from the US Commodity Futures Trading Commission showed.

Reuters data shows open interest in WTI strike options for US$60, US$70, US$80 and US$90 per barrel on NYMEX has risen steadily since January, showing that many traders are betting on rising prices. Volumes for US$100-a-barrel options have risen by almost 20 per cent.

While many traders speculate that prices may not fall much further, analysts said a big rally was also unlikely.

"Although there are tentative signs of demand improving and rig counts fell to the lowest level since 2010, an ongoing global market surplus - driven by swelling US inventories and Saudi Arabian output to record high levels - should limit any potential rally," ANZ said in a note.

Others were more cautious, warning that fundamentals were deteriorating.

"Global oil fundamentals have been quite strong YTD (year-to-date), but we now see signs that physical markets are weakening. Global refining margins, while still healthy, have fallen materially," Morgan Stanley said. "With US runs set to ramp over the coming weeks, global turnarounds rising and product demand weakening seasonally, we expect product builds and pressure on global refining margins, which should diminish the appetite for non US crudes."

REUTERS