Oil jumped more than 5 percent on Tuesday, the biggest gain in 16 months, as big money funds poured fresh cash into the market amid Opec cuts and cold US weather that could tighten supplies.
US light crude settled up $2.96 at $56.97 a barrel. It was the biggest jump since September 19, 2005, when prices surged 7 percent before Hurricane Rita slammed the US Gulf Coast, the second of two major storms to hit the key US energy region that season.
London Brent crude gained $2.71 to settle at $56.39 a barrel on Tuesday. The surge was fuelled by a rush of buying by funds ahead of a fresh Opec output cut. "There's a lot of money that had been on the sidelines that is starting to move in. If you look at the open interest, it lends credence to the theory," said Stephen Schork, president of The Schork Report.
Further support came from cold weather in the United States, after a mild start to winter in the world's top consumer in December and early January. "With the weather changing into real winter cold, this market looks to be more of a weather market," said Andrew Lebow, broker for Man Financial.
Analysts polled ahead of weekly US inventory data released on Wednesday forecast that the cold snap reduced US distillate inventories, including heating oil, by 2.2 million barrels last week. Crude stocks were expected to rise by 1.1 million barrels. After exceptionally mild temperatures, recent colder weather has helped prices recover some ground after dipping to a 20-month low on January 18 of $49.90 a barrel from $61.05 at the start of the year.
Opec producers were set to reduce supply to world markets by 500,000 barrels per day from February 1, and Nigerian Oil Minister Edmund Daukoru said most of the group agreed the cuts should be fully implemented before new measures are taken.
"There is a consensus to implement the cuts already announced rather than announce further cuts. I think everybody agrees we have just got to comply," he told Reuters after a meeting in the capital Abuja.
Some analysts have said the cuts would be enough to prevent further rises in commercial crude inventories when demand falls in the Northern Hemisphere spring. "The bottom line seems to be that they are taking oil off the market, although that doesn't mean the cuts are extremely bullish for oil," said Mike Wittner, analyst at investment bank Calyon.
"Opec needed to do it (cut) to match lower crude demand. I think the market is supported in the mid-$50s level. I don't have anything too bullish on the horizon over the next 30 to 60 days." Other market participants remain unconvinced that Opec has cut enough crude to balance the market. Tension between Iran and the West over Tehran's nuclear program, which helped send US oil to records above $78 a barrel last July, could also prop up prices.
Iran's support for anti-US extremists in Iraq should not go unchallenged, despite US hopes of avoiding confrontation with Tehran, John Negroponte, US President George W. Bush's pick for deputy secretary of state, said on Tuesday.
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