The price of oil has surged over $40 per barrel for the first time this year, as shifting sentiment raises hopes that a 20-month price rout is finally coming to an end.
Crude has climbed by almost 50 per cent from lows of $27 a barrel after sliding US production and discussions between Saudi Arabia and Russia eased fears that the price could fall below $20.
International benchmark Brent crude hit highs of $40.81 last night, while US West Texas Intermediate climbed to $37.84.
“Investors are responding to US production guidance that sounds very different from this time last year and talks between Opec and Russia have been taken as a good sign,” Abhishek Deshpande, oil analyst at Natixis told City A.M.
A key factor in the spike has been the continuing fall in US rig numbers, which have declined in the face of consistently low oil prices. Data shows that they have fallen under 400 for the first time since the financial crisis. This time last year the rig count stood at 922.
Meanwhile, Saudi Arabia is on the verge of brokering a deal with Russia to cap oil production and has already roped in fellow Opec members Venezuela and Qatar.
Opec countries will attend second round talks in Russia on 20 March, including Nigeria and the United Arab Emirates.
“It’s logical for everyone to freeze their production,” UAE energy minister Suhail Al Mazrouei said in Abu Dhabi yesterday.
The sudden price rally was not enough to scare off all the bears, however.
“We think the price rise is premature and it’s not going to last. Iran is going to continue to defy Saudi Arabia and the stockpiles in the US will take time to recede,” said IHS director Spencer Welch.
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Saudi Arabia’s rival Iran remains staunchly against the production freeze deal, vowing to increase its output to regain market share it lost during a trade embargo.
Despite the rising oil price, the FTSE 100 ended down for the day, but as the oil rally got underway stocks managed to pare back earlier losses.
Other commodities also rallied throughout the day. The price of iron ore jumped more than 20 per cent following signs from China that demand for iron – which is used in the production of steel – will be higher than expected.