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Oil's global benchmark rises 10pc in biggest rally in more than seven years

Oil rallied, capping the biggest two-day advance in more than seven years after a slump to a 12-year low prompted some investors to buy back record bearish bets.

Front-month futures jumped 21 per cent after the February contract expired Wednesday at $US26.55 a barrel, the lowest settlement since 2003. Speculators this month amassed the biggest-ever short position in US crude amid concern that turmoil in China's markets would curb fuel demand at a time when fresh exports from Iran exacerbate a global glut. Pierre Andurand, the founder of the $US615 million Andurand Capital Management who correctly predicted the slump in oil prices, said the commodity will end the year higher.

"Oil is going to rally into the spring," said James Cordier, founder of Optionsellers.com in Tampa, Florida. "It's a short-covering rally, but we do think it has legs to continue."

Oil is down about 13 per cent this year as turbulence in global markets adds to concern over brimming US stockpiles and the prospect of additional Iranian barrels. Markets could "drown in oversupply", sending prices even lower, according to the International Energy Agency. The energy industry is facing "very sharp shocks" as it struggles to deal with a "flood of oil," BP chief Bob Dudley said at the World Economic Forum in Davos, Switzerland.

On balance sentiment is starting to turn more optimistic about the outlook for oil.

West Texas Intermediate for March delivery gained $US2.66, or 9 per cent, to $US32.19 a barrel on the New York Mercantile Exchange. The 21 per cent gain in two days is the most since Sept. 2008. The volume of all futures traded was 36 per cent above the 100-day average.

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Brent for March settlement climbed $US2.93, or 10 per cent, to $US32.18 a barrel on the London-based ICE Futures Europe exchange.

The price of oil will probably rise to $US50 a barrel this year and $US70 a barrel in 2017, though investors should expect heightened volatility along the way, Andurand said Friday in an interview on Bloomberg TV.

Oil may be the "trade of the year" if it can weather the surge in the Middle East producer's shipments, according to Citigroup.

"There will be an initial wave of supply from Iran, but once that's done, it will be flat and I think that's when you start seeing opportunities for oil to turn," Ivan Szpakowski, an analyst at Citigroup in Hong Kong, said Friday. "Part of the reason oil is the trade of the year is because it's going to have such a broad effect, it's going to take a lot of asset classes up with it."

Citigroup is among forecasters predicting a gain in the second half, projecting an average Brent price of $US41 a barrel in the third quarter and $US52 in the last three months. This compares with a mean of about $US47 for the fourth quarter, according to 12 estimates this year compiled by Bloomberg.

The Chicago Board Options Exchange Crude Oil Volatility Index, a gauge of anticipated volatility in US crude prices, jumped to 67.93 on Wednesday, the highest level since March 2009. The index fell to 61.86 Friday.

Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest US oil-storage hub, increased for an 11th week to a record 64.2 million barrels, the EIA said in a report Thursday. Nationwide supplies were more than 100 million barrels above the five-year average at the end of 2015.

"The cold spell in Europe and the US, along with a few producers announcing lower production targets for the year ahead, provides a bit more fundamental support," said Richard Mallinson, an analyst at consultants Energy Aspects Ltd. in London.

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