Oil extends rally amid speculation slowdown in US shale boom will reduce surplus

On Friday oil extended its rally for a third day due to speculation that a slowdown in the U.S. shale boom will reduce a glut that’s driven prices to the lowest in 5 1/2 years, as Bloomberg reports.

In New York futures rose as much as 1.7 percent,  a seventh weekly decline. U.S. producers are bailing out of long-term contracts for drilling rigs as prices sink below $50 a barrel. U.S. crude stockpiles unexpectedly shrank by 3.06 million barrels in the week ended Jan. 2, according to the Energy Information Administration. 

West Texas Intermediate for February delivery climbed as much as 82 cents to $49.61 a barrel in electronic trading on the New York Mercantile Exchange and was at $49.23 at 11:59 a.m. Singapore time. Futures added 14 cents to $48.79 yesterday and are down 6.6 percent this week. The volume of all futures traded was 19 percent above the 100-day average.

Brent for February settlement rose 31 cents, or 0.6 percent, to $51.27 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $2.06 to WTI, compared with $3.73 at the end of last week.

“Some U.S. producers may need to reconsider their investments because oil prices have now halved,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo, said by phone to Bloomberg reporters today. “But it’s unclear if the declines are over.”

The OPEC is fighting a U.S. shale boom by resisting production cuts, signaling it’s prepared to let prices fall to a level that slows the highest American output in more than three decades.

Yousef Al Otaiba, the United Arab Emirates’s ambassador to the U.S., said in Washington that the nation has no plans to curb production no matter how low prices drop.

Helmerich & Payne Inc., the biggest rig operator in the U.S., said it had received early termination notices for four contracts, while a second contract driller, Pioneer Energy Services Corp., said four rigs had been canceled early. Producers may cut short another 50 to 60 agreements, according to Andrew Cosgrove, a Bloomberg Intelligence analyst.

Companies are paying to cancel rigs rather than keep drilling after the plunge in oil prices. Contracts for the 190 rigs that on-land drillers were projected to add this year, known as newbuilds, have the highest risk of being terminated, Cosgrove said.

Last week crude stockpiles in the U.S., the world’s biggest oil consumer, declined to 382.4 million barrels, according to the EIA, the Energy Department’s statistical arm.

The U.A.E. can sustain in the current market condition for “a lot longer than people expect,” the country’s Al Otaiba said. “This extra glut in the market is not coming from the OPEC members, so therefore why should the OPEC members have to cut their production?”

Implied volatility for at-the-money options in the front-month WTI contract advanced to 60.2 percent this week, the highest level in more than three years, data compiled by Bloomberg show. It’s about 46 percent today, while Brent’s volatility is near 44 percent.