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Oil prices rise on lower US rig count, but glut weighs

[SINGAPORE] Oil prices jumped on Monday following steep losses in the previous session, supported by a fall the US rig count, but analysts said general oversupply was keeping the market weak.

US crude futures rose over 3 per cent to above US$30 per barrel, trading at US$30.59 at 0809 GMT. International benchmark Brent was also up 2.4 per cent at US$33.83 per barrel. Both contracts fell almost 4 per cent on Friday.

A falling rig count in the United States that is expected to lead to a decline in 2016 production helped support prices, analysts said. "The US oil rig count continued to decline..., with a total of 26 rigs idled," Goldman Sachs said. "The current rig count implies ... annual average US production would decrease by 445,000 barrels per day yoy (year-on-year) on average in 2016," it added.

Despite Monday's gains, analysts said that market conditions remained weak, especially as demand is slowing. "The sharp deceleration in demand growth in recent months (especially gasoline) is a key feature of our more bearish view and expectations for a longer rebalancing period," Morgan Stanley said. "China demand looks particularly challenged with several negative trends of late," it added.

In the United States, record crude stocks of 504.1 million barrels were also weighing on markets, countering a proposed production freeze at January levels by Russia and the Organization of the Petroleum Exporting Countries (Opec).

Russia and Opec were both pumping oil at near-record volumes last month, with Russia reaching another post-Soviet high of 10.88 million barrels per day (bpd).

Freezing output at such levels would not help reduce oversupply, analysts said, as production outpaces demand by 1-2 million barrels every day. "Locking in countries' production near historic production highs does not change an oversupplied market," said Amos Hochstein, the US State Department's special envoy for international energy affairs.

Hochstein also said that Opec-member Iran would be unlikely to fix production at January levels, having been relieved of international sanctions. "I am highly skeptical of Iran, now off sanctions, committing to exports at sanction era lows," he said.

Iran, previously Opec's No. 2 exporter at almost 3 million bpd in 2011, wants to quickly raise its output to regain lost market share and plans to raise production by 700,000 bpd in the near future.

"Iran's return to the global oil market will add supply to an oversaturated market, but the country faces challenges in ramping up its production," Moody's Investors Service said. "To raise production Iran needs to regain its customer base, attract investment to upgrade its oil fields and successfully navigate a range of political risks," it added.


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