Complex Made Simple

Oil hits 2015 high as traders look beyond ample current supply

Oil's collapse in 2014 was due to ample supply and the refusal by the Organization of the Petroleum Exporting Countries to cut output

By Alex Lawler

LONDON, May 4 (Reuters) – Oil rose towards $67 a barrel on Monday to reach a 2015 high, supported by expectations the supply glut will ease and after weak Chinese factory activity reinforced views that stimulus measures would be rolled out.

Activity at China’s factories shrank at its fastest pace for a year as new orders fell in April, a private business survey showed on Monday, hardening the case for policy stimulus to boost the world’s second biggest economy.

Brent crude was up 39 cents to $66.85 a barrel by 0848 GMT, after hitting a 2015 peak of $66.95. U.S. crude gained 22 cents to $59.37. The U.S. benchmark hit its highest this year at $59.90 on May 1.

“The Chinese data is weaker but it seems the oil market has had a limited reaction. What the market really wants to see is supply being cut to match the demand level,” said Ric Spooner, chief market analyst at Sydney’s CMC Markets.

Brent has rallied by more than 40 percent from a near six-year low of $45.19 in January, supported by expectations of a tighter future supply and demand balance, as well as a weaker dollar and tension in the Middle East.

“The market is expecting the tightening in the second half of the year,” said Eugen Weinberg, analyst at Commerzbank.

“We argue this dynamic is hardly fundamentally sound,” he said of the market’s recent rally.

A public holiday in the UK on Monday is likely to limit trading volume.

Oil’s collapse in 2014 was due to ample supply and the refusal by the Organization of the Petroleum Exporting Countries to cut output. OPEC shifted strategy in a bid to slow competing supply sources, such as U.S. output, to defend its market share.

The drop in U.S. drilling has raised expectations of lower output and on Friday, oil services firm Baker Hughes Inc. said the number of active rigs has fallen for a record 21 straight weeks to the fewest since September 2010.

Weighing on oil prices were the latest signs that crude supply is currently very ample, including record Iraqi exports in April and OPEC oil output at its highest in 2-1/2 years.

A stronger dollar also provided a headwind. A firmer dollar makes dollar-denominated commodities more expensive for holders of other currencies and tends to weigh on oil prices. (Reporting by Alex Lawler and Jane Xie; Editing by)