NEW YORK (Reuters) - Oil rocketed more than 10 percent higher on Thursday, posting its biggest one-day rally in over six years as recovering equity markets and news of diminished crude supplies set off a short-covering scramble by bearish traders.
Snapping back from a deep two-month slump that knocked U.S. crude to 6-1/2 year lows below $40 this week, oil climbed as world stock markets rose on hopes Chinese government measures to stimulate the economy would pay off, while the dollar strengthened as risk aversion eased.
The rally was aided by news of a force majeure on Nigerian oil exports declared by Shell (RDSa.L) and private data indicating more drawdowns in crude this week at Cushing, Oklahoma, traders said. A big upward revision in second quarter U.S. economic growth helped.
Front month Brent crude LCOc1 for October more than reversed a week's worth of losses, rising $4.42 to settle at $47.56 a barrel, marking a 10.25 percent rise. Gains accelerated toward the close, locking in the biggest one-day jump since late 2008, when prices were bouncing back after the financial crisis. The contract traded on Monday at a March 2009 low of $42.23.
"Whenever you have a short-covering rally in a bear market they’re always violent. I wouldn't be surprised to see it continue another day or two," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow, New York. As buying pressure eases, prices may test new lows, he added.
That proved somewhat true in Thursday's post-settlement trade, when oil came off its highs, tracking a volatile U.S. stock market prior to Wall Street's close. Brent briefly gave back more than $1 from its settlement price before recouping all of it later.
U.S. crude CLc1 settled up $3.96, or 10.3 percent, at $42.56 per barrel, its biggest one-day percent gain since March 2009. It had hit a February 2009 low of $37.75 on Monday.
There were signs that Thursday's rally, while extreme, may not be long-lasting, traders said. Inter-month spreads, often a good indicator of physical market conditions, weakened on the day, while turnover was high but not extreme. Front-month Brent crude traded just over 315,000 lots, the most since early July but a quarter less than early February highs.
Even notionally bullish news came with a bearish context.
Shell declared force majeure on Bonny Light crude oil exports on Thursday following the shutdown of a 180,000 barrel per day (bpd) pipeline. But the disruption may have a limited impact on the market with some 10 million barrels of September-loading Bonny Light still unsold.
Since July, as oil prices embarked on a second steep decline of more than 30 percent, big funds and speculators nearly trebled their short positions in U.S. oil futures and options to more than 160 million barrels, just short of a record 180 million barrels in March, according to regulatory data. 3067651MSHT
Dealers have been bracing for that to unwind, with some warning that the scramble to exit those trades could be fierce.
"It's the squeeze on short-sellers that we've been anticipating after the oil markets saw panic selling and capitulation trade in the $30 levels," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland.
"Couple this with strong continued demand for gasoline and solid GDP numbers out of the U.S., and China's actions to reinflate their economy with a very shorted market, the near-term bounce we have been calling for appears to be working out."
U.S. nationwide crude oil stocks unexpectedly fell by more than 5 million barrels last week, and data from industry group Genscape showed that inventories in Cushing, Oklahoma, declined by another nearly 400,000 barrels since last Friday.
Even so, most analysts were pessimistic that oil could maintain its trek higher.
"The trend is strong and down. However, do not be wrong-footed by a correction higher," PVM Oil Associates technical analyst Robin Bieber said. "Few markets head forever in one direction with no respite."
Even the most bullish forecasters are conceding that oil prices are unlikely to stage a significant rebound soon. On Wednesday, Standard Chartered slashed its 2016 Brent crude oil forecast by $20 to $63.
Additional reporting by Lisa Barrington in London,; Robert Gibbons, Barani Krishnan and Catherine Ngai in New York; Editing by Marguerita Choy and Chris Reese