For the first time in three months, U.S. oil prices hit above $40 a barrel. The surge marked a staggering 54 percent increase after hitting a record low of $26.05 a barrel five weeks ago.
The Federal Reserve's decision last Wednesday to keep interest rates unchanged seemed to have caused the catalytic increase in oil prices. The Fed's decision also signaled - albeit unexpectedly - that it will increase the rates more gradually than what was previously expected despite market unpredictability and a frail global economy, according to Price Futures Group's senior energy analyst Phil Flynn.
The U.S. dollar is weakened by lower oil rates. And because the global oil trade runs in U.S dollars, the Fed's decision pushes oil producers to increase their prices so they can sustain their income. According to Flynn, the Fed's decision was like the "icing on the cake."
There were also other forces that contributed to the oil's dramatic rise in recent weeks. For instance, shale or kerogen shale producers made cuts in their output as well as laid off some of its workers. Last week, the numbers of their drilling rigs in the U.S. were a feeble 480 compared to the massive 1,125 last year.
Other major players including Chevron and Exxon Mobil also made cuts in their capital spending, which helped reduce oil production. Oil inventories in the U.S. are still bloated and continues to rise but in recent weeks, the speed at which they rise seemed much slower.
Small oil producers who let go of some workers are facing bankruptcy. More often than not, they don't have ample resources to restart their rigs despite the further rebound in oil prices.
Additionally, the tentative deal to hold off production by both Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC nations offered hope that the agreement will soon result in a final deal to make cuts in oil output.
"The market is very, very skittish. We could continue to see volatility," said Nasdaq's energy team director Tamar Essner. "I don't think this rally is based on fundamentals. We're still oversupplied. We're in the middle of a rebalancing process, one that takes time."
Photo: Tim Evanson | Flickr