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Oil prices shoot higher as investors worry about supply cuts

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Raven Drilling oil rig in the Bakken shale formation outside Watford City, North Dakota.

Crude-oil futures extended gains Tuesday, with prices rallying on speculation that a sharp decline in U.S. drilling activity will result in supply cuts.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March CLH5, +2.86% recently traded at $51.04 a barrel, up $1.46, or 3%, in the Globex electronic session.

Brent crude for March delivery on London’s ICE futures exchange LCOH5, +2.50% rose $1.93, or 3.5%, to $56.64 a barrel.

Both the global oil benchmarks have gained between 11% to 13% over the last three sessions, but market observers remain wary of the resilience of the latest oil-price rebound.

While cuts in capital expenditure and drilling will translate into slower non-OPEC production growth, supply may not be reduced in time to erase a projected global surplus of roughly 1.5 million barrels a day in the first half of 2015, Citigroup’s futures analyst Tim Evans said.

The oil market is vulnerable to further declines without some tightening of demand-supply fundamentals to go along with the advance, warned Evans.

“Brent and [Nymex] prices could grind lower into the second quarter until evidence mounts that a deceleration of non-OPEC supply growth is taking shape,” RBC Capital Markets analysts said, in a Tuesday note. RBC says severe capital spending cuts may be laying the groundwork for a recovery. Still, it cut its Brent crude forecast to $57 a barrel from $71 a barrel in 2015, and its Nymex crude forecast to $53 a barrel from $65 a barrel in 2015.

Data points this week include the American Petroleum Institute’s initial oil-inventory data later Tuesday, followed by U.S. Energy Information Administration figures on Wednesday. Investors expect another weekly increase in U.S. oil stockpiles to record levels.

Besides U.S. supplies, global inventories are also building up as more unused oil goes into storage in many countries, including a portion that is stored on tankers at sea.

Société Générale estimates that the global buildup in oil stockpiles in 2008-2009 was 210 million barrels, rising to 265 million barrels in 2014. “We forecast another large build of 300 million barrels during the first half of 2015,” it said.

Meanwhile, the Reserve Bank of Australia was the latest central bank to ease monetary policy in response to declining oil prices. It cut its benchmark interest rateto a record low of 2.25% Tuesday.

Investors are also tracking spending cuts and falling profits at major energy companies across the globe, as these will eventually feed into oil-production levels. Exxon Mobil Corp. XOM, +2.10% on Monday said its cash flow in the last three months of 2014 fell to the lowest level since 2009.

Asian oil companies, mainly state-owned entities, have also flagged double-digit spending cuts that would be finalized in coming weeks. These cuts threaten oil production in a region that is already struggling with slowing oil production volumes.

Nymex reformulated gasoline blendstock for March RBH5, +0.72% —the benchmark gasoline contract — rose 4 cents to $1.58 a gallon. Natural gas for March delivery NGH15, -0.30% rose 3 cents, or 0.1%, to $2.71 per million British thermal units.

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