The oil market is turning its attention back to the U.S. as more of its rigs return to work following a surge to $50 a barrel, raising concern that a production rebound may stifle crude’s recovery.
All eyes are on the U.S. response to higher prices, Morgan Stanley said in a report Monday. Drillers returned nine rigs to oil fields last week, the biggest gain since December and only the second addition this year, according to Baker Hughes.
“The biggest concern for prices going forward is whether the rig count will continue to pick up over the next few weeks,” said Angus Nicholson, a markets analyst at IG Ltd. “If we start to see a trend — three to four weeks of increases — there will be heightened concerns in the market and perhaps prompt a bit of a pullback to $40 a barrel or below.”
Oil has surged from a 12-year low earlier this year, putting it within range of a “sweet spot” for shale output that Citigroup sees between $50 to $70 a barrel. Prices have gained amid disruptions to global supply and a slide in U.S. production, with 500,000 barrels a day cut from the market as the rig count fell to the lowest level since 2009.
West Texas Intermediate oil for July delivery climbed Monday by 2.2 percent to settle at $49.69 a barrel on the New York Mercantile Exchange, the highest close since July 21.
Investors are buying commodities on speculation that the Federal Reserve will hold off from raising interest rates this month, which will weaken the dollar and bolster interest in raw materials priced in the currency. Eni said 65,000 barrels a day of crude output was halted Friday after a militant attack in Nigeria.
“We’re still dealing with follow-through from the jobs report Friday,” said Bob Yawger, director of the futures division at Mizuho Securities in New York. “The dollar isn’t doing much today but we still don’t think it’s reached its bottom. Eni’s problems in Nigeria are adding to the upward pressure.”
The rig count doesn’t respond immediately to price signals and there is typically a delay of three to four months, Morgan Stanley analysts including Adam Longson wrote in Monday’s note.