US oil closes above US$40 for first time in 2016

A pump jack stands idle in Dewitt County, Texas, on Jan 13, 2016.
A pump jack stands idle in Dewitt County, Texas, on Jan 13, 2016. PHOTO: REUTERS

NEW YORK (AFP) - Oil prices rallied for a second straight day Thursday (March 17), pushing US crude above US$40 a barrel for the first time this year.

Prices were lifted by a sharp drop in the US dollar and revived optimism that producers would strike a deal next month to freeze output.

US benchmark West Texas Intermediate for delivery in April jumped US$1.74 (4.5 per cent) to US$40.20 a barrel on the New York Mercantile Exchange. It was the first time WTI closed above US$40 since December 3.

In London, Brent North Sea crude for May delivery, the European benchmark, finished at US$41.54 a barrel, a gain of US$1.21 (3.0 per cent) from Wednesday's settlement.

Bob Yawger of Mizuho Securities USA said the big reason for the rally was Wednesday's Federal Reserve policy signals, which included scaling back the path for future US interest rate increases.

The Fed moves sent the dollar lower against other major currencies for a second straight day, weighing on crude oil, which is priced in the US currency.

"You have a weak dollar today and the reverse correlation with crude oil is going to rally crude," Mr Yawger said. "The dollar index, for example, is at a five-month low while at the same time you see a three-month high in crude oil. That's why you see so much strength."

The prospect of production freeze talks on April 17 between Opec and non-Opec producers also continued to support the market.

But central banks are playing a part, too, said Matt Smith of ClipperData.

"While producer jawboning has played its part in igniting a crude oil short-squeeze, central banks area are as much responsible for the recent rally," he said.

"Negative rates, stimulus measures and ongoing accommodative monetary policy have boosted market sentiment."