Oil rose in New York amid speculation the oversupply still weighing on global markets will diminish, even after prices fell into a bear market on Monday.
Futures gained 0.8 percent after dropping below $40 on Monday for the first time since April. While crude and gasoline inventories are forecast to have declined, they will remain at the highest seasonal level in at least two decades. Still, the retreat is driven by a seasonal slowdown in U.S. fuel demand and prices will rebound above $50 a barrel by year-end as American shale production retreats, according to Bank of America Merrill Lynch.
Oil has tumbled more than 20 percent from its peak in June — the common definition of a bear market — halting a recovery that saw prices almost double from a 12-year low in February. The supply glut is upsetting industry expectations, with BP Plc, Royal Dutch Shell Plc and Exxon Mobil Corp. reporting second-quarter earnings last week that were worse than estimated.
“What’s going on right now is actually quite seasonal, we’re still looking for oil to be back in the $50-plus range heading into year-end,” Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, said in a Bloomberg television interview. “Supply’s already contracting and demand’s still okay.”
West Texas Intermediate for September delivery was at $40.56 a barrel on the New York Mercantile Exchange, 50 cents higher,shortly after 7:50 a.m. Central. The contract slid $1.54, or 3.7 percent, to $40.06 on Monday, the lowest close since April 18. Total volume traded was about 6 percent below the 100-day average.
Brent for October settlement rose 57 cents to $42.71 a barrel on the London-based ICE Futures Europe exchange. The contract dropped $1.39 to $42.14 a barrel on Monday. The global benchmark traded at a premium of $1.53 to WTI for October.
To find out why analysts are still predicting higher prices next year, click here.
U.S. crude stockpiles probably dropped by 1.75 million barrels last week, according to a Bloomberg survey before a report from the Energy Information Administration on Wednesday. Supplies rose to 521.1 million barrels through July 22, keeping them more than 100 million barrels above the five-year average. Gasoline inventories probably fell by 1 million barrels last week.
“The period for the market to balance out is taking longer than expected,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by e-mail. “The market faces continuing oversupplies of crude and products as well as an increase in U.S. oil production.”
Supplies could swell further as OPEC nations work to restore halted output, with factions in Libya reaching a deal to re-open oil terminals and Nigeria resuming payments to militants in the oil-rich Delta region.