Crude oil surged to its biggest gain in 16 months on speculation that colder weather and an improving economy will spur U.S. fuel consumption.
The National Weather Service predicted that below-normal temperatures will persist in the eastern U.S. for the next two weeks, and the price of natural gas, the country's most common home-heating fuel, jumped 11 percent. Consumer confidence in the U.S., where 25 percent of the world's oil is consumed, neared a five-year high, a report today showed.
``It's finally gotten cold, which will boost demand for natural gas and heating oil,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons in St. Louis. ``There's been a steady stream of good economic news in the U.S.,'' he said. ``The energy markets can no longer shrug off the economic numbers.''
As this daily chart of oil below shows, the market was probably a bit oversold at current levels. That means traders were looking for a reason to buy:
However, cold weather can't last forever to provide a floor for the oil market. But that wasn't the only reason mentioned for today's rally:
Oil is also getting support from the prospect that the Organization of Petroleum Exporting Countries will follow through on its pledges to cut production. The group, which pumps 40 percent of the world's crude, agreed in December to cut output by 500,000 barrels a day as of Feb. 1. That's on top of a reduction of 1.2 million barrels a day that went into effect in November.
OPEC's production cuts are finally having an impact on trader psychology.
But, that's not the only reason either. As mentioned above, all of the good economic news coming from the US us finally sinking in. A faster economy = more oil consumption by the US. In other words, the Goldilocks crowd hasn't counted on increasing oil prices.
To take this one step further, what does this mean for interest rates? All of the recent Fed statements have said inflation is still too high. This does not bode well for future rate cuts. In fact, I would guess that if oil continues rallying for the foreseeable future, rate cut talk will be declared dead on arrival.
