D Dominion Energy Inc

Oil prices surged to a two-week high after data showed an unexpectedly large decline in U.S. crude stockpiles, raising expectations that a lingering supply glut is about to ease.

Crude climbed 4% in less than an hour late Wednesday morning after data from the U.S. Energy Information Administration showed stockpiles fell by 2.1 million barrels last week. Analysts had forecast an increase of 1.1 million barrels, and the surprise decline ignited hopes that long-discussed cutbacks in U.S. oil production are starting to make an impact.

"For months and months and months, we've talked about production falling, and it hasn't been as steep of a fall as many people thought," said Todd Garner, managing partner at hedge fund Protec Energy Partners LLC in Boca Raton, Fla. "It's finally starting to happen."

Light, sweet crude for October delivery settled up $2.56, or 5.7%, to $47.15 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, gained $2.00, or 4.2%, to $49.75 a barrel on ICE Futures Europe.

Oil prices are still down more than 55% from their highs of 2014, a swing sparked by a boom in production from U.S. shale. Many analysts and others in the oil market warned that the boom is still going strong, with producers pumping to help pay debts and keep their companies afloat.

But Wednesday's move appears to fit a pattern this year in which investors bet big on signs that the collapse in prices is forcing producers to cut back. Oil futures climbed 25% in three days less than a month ago on speculation that Russia and other exporters would pull back on their efforts to keep pumping cheap oil to outdo U.S. competitors. Oil prices surged in April on signs U.S. production had passed a peak and oil surged more than 8% on one day in January after a steep drop in the number of rigs drilling for U.S. oil.

The latest run came after EIA said domestic crude inventories fell to 456 million barrels last week from 458 million the week before. The data added to an optimistic picture painted by the price of actual physical oil, which has frequently been higher than futures, said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston. "The market balance is probably tighter than people have given it credit for," he said.

Bulls were also ignoring several factors that could cause a rally to fall apart just as every other rally has so far this year, brokers and analysts said. Domestic production dropped by just 0.2% to 9.1 million barrels a day, EIA said. Gasoline stockpiles grew by 2.8 million barrels, compared with analysts' expectations for a 200,000-barrel decline. Diesel supplies rose by 3.1 million barrels, more than the 900,000-barrel increase that analysts had expected.

Refineries are still taking cheap oil and turning it into more gasoline and diesel. Crude stockpiles will eventually start to back up once those refineries go into maintenance, which usually happens at this time of year, brokers and analysts said. Because they are still running at an unusually strong rate, gasoline and diesel stockpiles are growing at an exceptionally fast pace and Gulf Coast storage has hit a record of nearly 70 million barrels, Citigroup Inc. said in a research note about the inventory data. "The crude surplus is just being converted into a petroleum product surplus," the bank's analysts said.

Gasoline and diesel futures initially dipped on the news, but quickly rebounded and followed oil prices higher. Gasoline futures settled up 4.92 cents, or 3.7%, at $1.3821 a gallon. Diesel futures gained 4.14 cents, or 2.8%, to $1.5414 a gallon.

Mr. Garner, the trader at Protec Energy with $100 million under management, said the firm is largely betting against oil prices, though it has had to close out some of those positions in recent days. He and Ric Navy, senior vice president for energy futures at brokerage R.J. O'Brien & Associates LLC, warned that traders should not overlook the bearish indicators in the EIA data.

"I don't think this is a fundamental shift in the market," Mr. Navy said.

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

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(END) Dow Jones Newswires

September 16, 2015 15:45 ET (19:45 GMT)

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