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.
Still, it's far from assured that oil prices won't see more setbacks as the year progresses. As the chart below shows, in January of last year, prices bottomed out also, but only temporarily. Prices rallied 55%—from a low of $45 to nearly $70—before resuming their decline to new lows in the fall.
Brent Crude Oil Price
The bullish outlook hinges on U.S. production continuing lower and OPEC production at least remaining stable. If prices rise high enough, U.S. producers may begin to drill again, creating another glut.
Even shakier is the truce between the various OPEC countries and Russia. Since mid-2014, OPEC increased output by 3 million barrels per day, while Russia increased its output by 300,000 barrels per day.
It's foolish to believe that these oil-producing countries, which are highly suspicious of each other, will adhere to the production freeze agreement for any significant length of time. Iraq in particular―where output rose by nearly 1.5 million barrels per day in the last year and a half―is a country where a lot of new supply is likely to continue to come from.
Iraq Crude Oil Production
Then there's the ongoing question of how much storage capacity is left to store all the excess crude around the world. Some analysts still see the potential for a "full storage" scenario that pushes prices significantly lower.
Other analysts downplay the idea, claiming there is ample storage to store the excess oil.
According to the International Energy Agency, global storage capacity is surging this year and has "so far ... remained ample to absorb the extra supply." However, the agency still sees "tank tops coming under pressure," forcing significant volumes of oil to be stored at sea.
It certainly feels like oil prices have turned the corner and put in at least a short-term low. But there are so many unknown variables that it is difficult to forecast with any sense of conviction where prices will be six months from now.
In any case, it's too early to give the "all clear" sign when it comes to oil, and volatility is sure to remain a feature of the market as long as supply continues to exceed demand by a significant margin.
Contact Sumit Roy at [email protected].