An oil tanker passes near DCOR LLC's Edith offshore oil and gas platform in the Beta Field off the coast of Long Beach, California, U.S., on Tuesday, May 18, 2010. Senators from California, Oregon and Washington introduced legislation last week to ban offshore oil drilling off the West Coast amid mounting concern about the BP Deepwater Horizon rig spill spreading in the Gulf of Mexico. Photographer: Tim Rue/Bloomberg

Oil added to Friday’s powerful advance with Brent crude rising above $54 a barrel in the wake of drilling data that raised hopes of a production slowdown in the US.

Brent, the international oil marker, jumped 8 per cent on Friday — its biggest one day percentage increase since 2009 — following news that almost 100 rigs previously drilling for oil in the US had been idled.

This was one of the sharpest weekly declines on record and fuelled talk that non-Opec production will fall this year, helping to balance a market that analysts say could be oversupplied by around 1.5m barrels a day in the first half of 2015.

“We already see significant adjustments in supply and demand balances due to lower prices”, said JBC Energy, a consultancy, adding reactions by the US shale industry and international oil companies had been “swift and strong”.

Companies such as Royal Dutch Shell and ConocoPhilips have slashed billions of dollars from their investment programme in response to lower prices. Others are expected to follow.

Optimism that oil had found a floor helped ICE March Brent gain a further $1.45 to $54.43 a barrel on Monday and West Texas Intermediate, the US crude benchmark, added $1.08 to $49.37.

Crude has dropped almost 60 per cent since mid-June because of a combination of strong supply growth from US shale projects, sustained Opec output and weak global demand.

The sell-off accelerated in November after the cartel decided to hold production at 30m barrels a day, rather than cut it to shore up prices.

However, several analysts cautioned against reading too much into the US rig count data. Adam Longson of Morgan Stanley said the market had got too excited by the headline figures.

“They may look impressive, but as we look at the data, much of the drop in oil rig count has come in low yielding vertical/directional rigs — ie. the low-hanging fruit,” said Mr Longson in a report.

“Even within horizontal rigs, much of the decline has come in lower performing plays or lower tier counties within high-quality plays.”

Indeed, while US rig counts are falling, US domestic production is still rising — it reached a 31-year high of 9.2m b/d last week.

As such, many people in the oil industry believe the price will need to trade around $40 a barrel for a sustained period of time to slow supply growth and keep capital investment in US shale sidelined.

“The price decline is not at an end,” said Philip Verleger, an energy economist, in a report. “It could easily go further, especially if the United States needlessly inflames low-cost oil producers by lifting its oil export ban.”

Many traders said Friday’s surge in oil price was a “short covering rally caused by hedge funds and speculative investors closing bearish bets”.

They pointed to the latest data from the US Commodity Futures Trading Commission that showed hedge funds and other money managers raised their short position in WTI to almost 130m barrels in the week to January 27 — the most since November 2010.

Nonetheless, an increasing number of industry watchers believe the supply adjustments brought on by lower oil prices will be bigger and faster than widely (and originally) expected.

“If our fundamental assessments of the oil market are anywhere close to the realised path, Opec might have all hands full to do to contain a looming price spike later on in this decade,” said JBC.

“In fact, with an expected 850,000 barrels a day of price-induced adjustments in second half of this year, the market might already be balanced over that timeframe.”

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