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Oil in biggest rally since August

Oil rallied, heading for biggest two-day advance since 2009 after a slump to a 12-year low prompted some investors to buy back record bearish bets.

Front-month futures have jumped more than 18 percent after the February contract expired Wednesday at $26.55 a barrel, the lowest settlement since 2003. Speculators this month amassed the biggest-ever short position in U.S. crude amid concern that turmoil in China’s markets would curb fuel demand at a time when fresh exports from Iran exacerbate a global glut. Oil may be the “trade of the year” if it can weather the surge in the Middle East producer’s shipments, according to Citigroup Inc.

“Oil is going to rally into the spring,” said James Cordier, founder of Optionsellers.com in Tampa, Florida. “It’s short-covering rally, but we do think it has legs to continue.”

Oil is down 15 percent this year as turbulence in global markets adds to concern over brimming U.S. stockpiles and the prospect of additional Iranian barrels. Markets could “drown in oversupply,” sending prices even lower, according to the International Energy Agency. The energy industry is facing “very sharp shocks” as it struggles to deal with a “flood of oil,” BP Plc Chief Executive Officer Bob Dudley said at the World Economic Forum in Davos, Switzerland.

Oil Supplies

West Texas Intermediate for March delivery gained $1.94, or 6.6 percent, to $31.47 a barrel at 10:46 a.m. on the New York Mercantile Exchange. Front-month futures have advanced 18 percent in two days, the most since January 2009. The volume of all futures traded was 64 percent above the 100-day average.

Brent for March settlement climbed $2.04, or 7 percent, to $31.29 a barrel on the London-based ICE Futures Europe exchange.

“There will be an initial wave of supply from Iran, but once that’s done, it will be flat and I think that’s when you start seeing opportunities for oil to turn,” Ivan Szpakowski, an analyst at Citigroup in Hong Kong, said Friday. “Part of the reason oil is the trade of the year is because it’s going to have such a broad effect, it’s going to take a lot of asset classes up with it.”

The Chicago Board Options Exchange Crude Oil Volatility Index, a gauge of anticipated volatility in U.S. crude prices, jumped to 67.93 on Wednesday, the highest level since March 2009. The index fell to 64.33 today.

Oil should hit a bottom within one to three months, Szpakowski said. Citigroup is among forecasters predicting a gain in the second half, projecting an average Brent price of $41 a barrel in the third quarter and $52 in the last three months. This compares with a mean of about $47 for the fourth quarter, according to 12 estimates this year compiled by Bloomberg.

Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest U.S. oil-storage hub, increased for an 11th week to a record 64.2 million barrels, the EIA said in a report Thursday. Nationwide supplies were more than 100 million barrels above the five-year average at the end of 2015.

“The cold spell in Europe and the U.S., along with a few producers announcing lower production targets for the year ahead, provides a bit of more fundamental support,” said Richard Mallinson, an analyst at consultants Energy Aspects Ltd. in London.-Bloomberg