Why Oil Surged 50% In 6 Weeks

March 08, 2016

Just when everyone thought they could only keep going lower, oil prices stunned the world and went the other way this year. From a low of around $27/barrel on Jan. 20, Brent crude oil rallied to more than $41 on Monday, March 7. That's a whopping 52% gain in just 6 ½ weeks.

The United States Brent Oil Fund (BNO) gained 38% in that same period, while the Energy Select SPDR (XLE | A-92) rallied more than 20%.

An increasing number of analysts are now suggesting that the bottom is in for the beaten-down commodity, with even higher prices ahead. Is that truly the case?

US Output Moves Lower

One thing that's clear is that nothing much has changed fundamentally since the Jan. 20 lows in oil. The market remains oversupplied to the tune of 2 million barrels per day this quarter, according to the International Energy Agency.

However, at a certain point, prices reflect all the bad news and more. Potentially, oil reached that point when it hit $27 for Brent and $26 for West Texas Intermediate.

Since then, there's been evidence of U.S. production edging slightly lower and OPEC production flattening out. According to the latest data from the Energy Information Administration, U.S. output touched 9.08 million barrels per day in the week ending Feb. 26―the lowest level since November 2014.

U.S. Crude Oil Production

With the U.S. oil rig count moving below 400 for the first time since 2009 last week, some analysts see the trend of lower U.S. output continuing.

OPEC + Russia Production Freeze

Meanwhile, OPEC production averaged 33.1 million barrels per day in February, according to Bloomberg―close to where it was in December and January.

Last month, Saudi Arabia, Russia, Qatar and Venezuela agreed to freeze their output at January levels, a move designed to at least stop adding to the global oversupply.

If the countries hold true to their promise, the freeze would ultimately tighten the market by reducing future supply. Some argue that OPEC and Russia could take it a step further in the coming months by actually cutting production, which would be unequivocally bullish.

Head Winds Remain

With sentiment so bearish and prices so cheap, it didn't take much to move oil prices sharply higher.

And though the market remains oversupplied right now, the ingredients certainly seem to be in place for a turn in the fundamentals down the line. That's likely what traders were thinking as they bid prices up by nearly half in the past several weeks.

Find your next ETF

Reset All