Crude oil rallies, after slump pulls in bargain hunters

London (Aug 2)  Oil prices rebounded sharply on Tuesday after a slide below $40 a barrel triggered some bargain hunting, although analysts said worries about a global glut in the oil market could take prices to as low as $35 in the near term.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September CLU6, +1.17% jumped 36 cents, or 0.9%, to $40.43 a barrel, after trading as low as $39.85 a barrel.

The contract on Monday re-entered bear-market territory,  closing down 21.8% from a 52-week high of $51.23 hit in early June. A bear market is defined as a fall of 20% from a recent peak.

The October contract for Brent crude LCOV6, +1.68%  on London’s ICE Futures exchange gained 44 cents, or 1.1%, to $42.58 a barrel.

Oil prices rallied earlier in the summer, thanks to a group of temporary factors, such as wildfires in Canada and oil-worker strikes in Kuwait. But as the impact of those interruptions faded, investors shifted their focus back to the oversupply issues that have dogged the oil markets for two years.

“The world is so oversupplied and the pace of rebalance is so slow that even geopolitical factors such as the ongoing civil strife in Nigeria are not enough to offset the fall in prices,” said Gao Jian, an energy analyst at SCI International.

Seasonal factors

Other factors — the recent uptrend seen in U.S. oil drilling activities, Libya’s expected return to the oil exporting markets, and the likely output increase by prominent Organization of the Petroleum Exporting Countries members such as Iraq and Iran last month — are also sparking stronger risk-off sentiment across commodities.

OPEC’s July monthly oil report, which offers the cartel’s own demand and supply outlook, is expected to be released Aug. 10.

Adding to the concerns is the fact that many refineries in the U.S. and Asia are undergoing seasonal maintenance. The reduced refining rate “will add to the supply backlogs, as crude flows will have nowhere to go,” said Stuart Ive, a client manager at OM Financial.

“This seasonal drop in prices does still have room to target $35 before maybe reversing toward the end of the year,” he added.

Pope Francis speaks out on Islam and terrorism

Pope Francis said Islam shouldn't be identified with violence and suggested that the social marginalization of Muslim youth in Europe helps explain the acts of those who joined extremist groups.

Moreover, while refiners are taking a breather given the lower margins, oil drillers in the U.S. are becoming more encouraged. According to industry group Baker Hughes data, the number of active oil rigs in the U.S. has risen in the eight of the nine weeks since oil prices hit $50, lifting the count by 18% over that span.

All eyes will be watching the weekly U.S. oil stockpiles and production report slated for release Wednesday. Based on an estimate by analysts surveyed by S&P Global Platts, U.S. crude stockpiles likely fell 1.9 million barrels last week, while gasoline stocks decreased 400,000 barrels.

Ahead of the official data, the weekly inventory data from the American Petroleum Institute will come out Tuesday afternoon.

Elsewhere in the energy spectrum, gasoline for September RBU6, +1.67%  gained 1.5% to $1.32 a gallon, while natural gas for the same month NGU16, +0.00%  rose 0.7% to $2.79 per million British thermal units.

Source: MarketWatch