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Oil price rises: is this the end of the slump?

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“The trend is strong and down… do not be wrong-footed by a correction higher…”

Aug 28, 2015: Brent in biggest one-day surge since December 2008 as pipelines closed down

Oil prices are continuing to rise after the market posted its biggest one-day surge for close to seven years, a recovery that comes off the back of a sharp decline earlier this week.

The Financial Times reports the international benchmark Brent crude jumped by more than 10 per cent, or $4.42, to settle at $47.56 a barrel on Thursday. On Friday morning it had fallen slightly in early trading and was hovering around $47.

This recovery had followed several days in which a renewed slump, which set in earlier in the summer, gathered pace. Prices hit a post-financial crisis low of close to $42 a barrel on Tuesday. Even now Brent is only back to where it was a week ago and at a level that remains punishing for producers in many regions. US crude settled at $42.86, another week-long high but relative low.

Thursday’s recovery was driven by two factors, the most prominent of which, the FT suggests, was Shell closing two pipelines and cutting shipments from Nigeria, Africa’s largest oil producer. At a time when the market is heavily oversupplied this gave cheer to traders who were already buying on the back of a continued strong rally in equities and improved economic growth figures in the US.

A second factor was traders covering ‘short’ positions – bets the price would fall – in the face of the surprise rebound. Investors such as hedge funds “scrambled to buy back positions… squeezing prices higher”.

So is this the beginning of the end for the latest oil trough, or merely a ‘relief rally’?

Reuters says there is evidence to suggest the latter, as the market in oil contract derivatives “remained muted… suggesting most big traders were shrugging off the move as merely a correction in the year-long bear market”. The news agency cites comments from BMI Research suggesting that the recent selloff was “overdone” and that prices could recover to $50-$60 a barrel, before falling again.

“The trend is strong and down… do not be wrong-footed by a correction higher,” PVM Oil Associates technical analyst Robin Bieber told Reuters, in a report published on CNBC. “Few markets head forever in one direction with no respite.”

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