5 Reasons Why Oil Prices Spiked Higher This Week

By Markets Fool.com

Energy company executives and their investors breathed a sigh of relief this week as oil prices spiked higher. Prior to Friday's trading session, oil prices had risen six straight trading days for gains totaling 12%. The U.S. benchmark WTI oil price set a new high for the year just under $57 per barrel, while global oil benchmark Brent climbed up to nearly $64 per barrel. Here are the five factors that led to this past week's surge in oil prices.

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No: 1: Slowing inventory rise
Oil traders were downright giddy on Wednesday after a U.S. government report showed that crude oil inventories had risen much less than expected. While the U.S. added another 1.3 million barrels to storage, that was well below the 3.5 million barrels that analysts were expecting. It was also a huge drop from the 10.9 million barrels added to storage the week before. This suggests two things to the market. First, that the worrisome glut of oil that has storage capacity quickly filling to the brim might not hit capacity as quickly as investors feared, if at all. Further, the weaker inventory build suggests that demand for oil is starting to pick up and could start eating into the glut of stored oil.

No: 2: Demand is picking up
A weaker than expected inventory build isn't the only bullish sign that oil demand is picking up. The International Energy Agency revised its oil demand growth estimate upward for 2015 as it sees a "stronger than expected demand response" from lower oil prices. It now sees an extra 90,000 barrels a day of demand in 2015 for a total of 93.6 million barrels a day. Given that weaker than expected demand is what sent oil prices tumbling, this is a key bullish sign for the oil market.

No: 3: Supply growth is slowing
Meanwhile, the supply side of the equation is also starting to see signs of an improvement as non-OPEC production, especially in the U.S., appears to be heading lower. This was after the U.S. rig count fell below 1,000 rigs for the first time since 2009. OPEC sees the cut in the rig count leading to lower output from non-OPEC producers, which is why it ratcheted down supply growth by another 165,000 barrels a day.

That said, OPEC continues to show no sign that it's about to curb its own production. In fact, last month it collectively boosted its production by 811,800 barrels a day to 30.79 million barrels per day. The Saudis alone increased their crude output by 658,800 barrels a day, which is like adding a half a Bakken shale in just the past month. They're making it clear that they plan to take market share in the current weak oil market.

No: 4: Al-Qaeda in Yemen
Also impacting the supply picture are the growing tensions in Yemen. It's not a major oil producer as it contributes less than 0.2% to global output, but what oil it does produce came under the control of a tribal group made up of former Al Qaeda militants. This was after the group took control of a major southern oil terminal in the country when Yemeni military forces withdrew from the site. The terminal is one of the major hubs in the southern region of the country, from which Yemen exports 120,000 to 140,000 barrels of oil per day. If that oil comes off the market it could tighten supplies. Further, Yemen also controls access to one of the seven major choke points of the global oil trade, which could be at risk of being shut down if tensions continue to escalate.

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No. 5: Sentiment gains
With signs that demand is picking up and supplies are starting to come down, oil traders have more confidence that the current glut is starting to ease. This is why oil traders have been increasing their bullish bets on crude while also taking off short positions. Meanwhile, investors have been pouring money into the energy sector, which has enabled beleaguered oil companies to raise much needed capital to weather the storm. In addition to that, a recent announcement of a megamerger in the in the industry, at a huge premium no less, has fueled bullish sentiment in the sector and hope that more deals could follow, leading to better profitability down the road.

Investor takeaway
Oil prices rallied over the past week as investors saw key signals that the glut of oil is easing. Not only is the demand picture improving, but the oversupply of oil seems to be easing. This suggests that the worst phase of the downturn just might be in the rear view mirror.

The article 5 Reasons Why Oil Prices Spiked Higher This Week originally appeared on Fool.com.

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