Oil rises 5 percent as cold snap boosts demand

Oil rose 5 percent on Friday to above $30 in its largest weekly rally in three months, as a cold front sweeping the United States and Europe as well as firmer financial markets gave traders reason to cash in on record short positions. Crude futures were poised for their first weekly gain this year, but analysts said there had been no shift in the fundamental backdrop of supply that far exceeds demand and swelling inventories of unwanted oil and oil products.

"There is no fundamental justification whatsoever to think that the current downtrend is changing," said PVM Oil Associates analyst Tamas Varga.

"All one has to do is look this month's report from the IEA to see that, especially the first half of this year, the market is going to be oversupplied," he said, referring to a report by the Paris-based International Energy Agency. Brent LCOc1 was up $1.58 at $30.83 a barrel by 0944 GMT, off this week's 2003 low of $27.10 and heading for a more than 6 percent weekly gain. U.S. crude CLc1 was up $1.35 at $30.88 a barrel, set for a weekly rise of over 4 percent. In its monthly report on Tuesday, the IEA said the oil market would produce more than it consumed for at least another year and risked "drowning in oversupply". That said, this week traders have bought a raft of derivatives that would give them the option to buy oil at $40 a barrel by the end of the year, suggesting that the worst of the rout may be over for now.

"From a technical standpoint we could bottom at any time since we have breached the post Lehman-Shock lows, but people still feel that inventories will continue to rise as global crude supply continues to outpace demand," said Tony Nunan, oil risk manager at Mitsubishi Corp in Japan. "Fundamentally, oil prices are already too low if you look at the medium to long term," said Nunan, "but how far will sentiment continue to drive prices is difficult to say."