PJC Piper Jaffray Companies

By Timothy Puko 

U.S. oil prices made some of their biggest gains in the last month as supply outages boosted prices, helping them rise Monday to their highest settlement in nearly 10 months.

Attacks and threats to the Nigerian oil industry have traders concerned about length supply disruptions, reinvigorating a lengthy rally that had been slowly retreating from $50 a barrel. A dollar that has pared gains from overnight and price hikes from Saudi Arabia has also helped break a string in which oil had lost ground in five of the past six sessions, an analyst said.

U.S. crude oil for July delivery settled up $1.07, or 2.2%, at $49.69 a barrel on the New York Mercantile Exchange, its highest settlement since July 21. Brent crude, the global benchmark, gained 91 cents, or 1.8%, to $50.55 a barrel on ICE Futures Europe, its highest settlement since Oct. 9.

Attacks from Nigerian militants calling themselves the Niger Delta Avengers have already cut the country's supply to multiyear lows. Friday morning bombings struck two pipelines, with Royal Dutch Shell PLC confirming signs of a spill from one it owned. The purported Twitter account of the avengers called one of the attacks part of its promise "that Nigeria Oil production will be Zero."

So far it is down to about 1 million barrels a day from 1.8 million earlier this year, said Piper Jaffray Cos.' Simmons & Co. International, citing government officials. The bank's energy analysts said it appears Nigeria's Forcados export terminal won't reopen in June and that Nigerian production is more likely to come in below estimates this year, making it more likely global stockpiles will start to drain in the second half of the year.

"If the Nigerian output goes to Zero...(prices) are going higher," ICAP PLC broker Scott Shelton said in a note. "At this point, there is no sign that Nigeria is getting any better, and it's looking worse."

Last week at a meeting between members of the Organization of the Petroleum Exporting Countries, Nigerian Oil Minister Emmanuel Ibe Kachikwu told reporters that he had met with militants to try to prevent future attacks and thereby reduce production outages. Full production at Forcados will be restored by the end of August, Mr. Kachikwu said.

In recent weeks, outages in Nigeria and Canada have removed more than three million barrels of crude from the market a day. Citigroup's commodities strategies team said the supply-demand imbalances are likely to keep Brent oil above $50 a barrel in the third quarter, and up to around $65 by the end of 2017, the bank's analysts said in a note Monday.

"Oil is not conducive to a stable price environment and expect a volatile path for prices," the bank said.

Dollar-denominated oil also usually gains ground as the greenback sinks, which it did Monday. The Wall Street Journal Dollar Index, which tracks the dollar against a basket of other currencies, recently traded up 0.1% at 86.22 after steadily paring gains that had taken it as high as 86.50 overnight.

The markets were also likely responding to price cuts that Saudi Arabia made for Europe, said Kyle Cooper, managing director of research at IAF Advisors, a Houston consulting firm. In an email sent to customers, state oil company Saudi Aramco said it had cut its light crude prices by 35 cents a barrel to northwest Europe and by 10 cents a barrel to the Mediterranean for July deliveries.

But the rally in U.S. oil stalled out just shy of $50 a barrel, the fourth time that has happened in the last eight sessions. Many have predicted that oil could hold near $50 for a while as traders reassess the market at a popular price for automatic buy and sell orders, and options strike prices. A big move could follow.

Many expect that move to be lower. Citigroup surveyed investors and found about 60% expecting prices to be between $35 and $55 a year from now. Only about 35% expect them to be higher than that, the bank said.

"The (bulls) don't have the factors they need to drive prices significantly higher," said Gene McGillian, an analyst at Tradition Energy who argued that outages in Africa could end in months if not weeks. "There's a huge amount of oil around the world."

Price gains are limited by U.S. production figures, which show that output is recovering. Higher oil prices are likely enticing U.S. producers back to the market, as oil becomes more cost-effective to produce, analysts said.

A survey from Baker Hughes Inc. on Friday showed that active rig counts in the U.S. rose by nine last week, the first increase in 11 weeks.

Many shale producers have costs between $30 to $50 a barrel and are likely lured into drilling more at current prices, further drenching the still-oversupplied market, said OCBC economist Barnabas Gan. If the trend continues, it could cause prices to tumble again as supply outstrips demand, analysts said.

Gasoline futures lost 1.2% to $1.5887 a gallon. Diesel futures gained 1% to $1.5031 a gallon.

Miriam Malek, Jenny W. Hsu and Benoit Faucon contributed to this article.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

June 06, 2016 15:59 ET (19:59 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.