LONDON: Brent crude oil rose above $86 a barrel on Friday, bouncing from near four-year lows as investors bought back into a market they said was oversold, and as fighting in Iraq increased political risk.
Oil has lost more than a fifth of its value since June on heavy oversupply, signs of weak demand growth and indications that key oil producers, particularly Saudi Arabia, have a limited appetite to intervene on prices.
"Prices have likely overshot to the downside," said Jeffrey Currie, head of oil analysis at Goldman Sachs. "This leaves us near-term constructive despite being bearish as we look further out."
The oil sell-off had been driven by "expected fundamental shifts as opposed to currently observable shifts", Currie and his colleagues said in a note to clients. Brent for December rose $1.52 to a high of $87.34, before slipping back to around $86.25 a barrel by 1330 GMT, but was still on track for its fourth weekly loss in a row. The November Brent contract expired on Thursday. US November crude, heading for its third weekly decline, was up 55 cents at $83.25.
The optimism was also felt in European stock markets, which jumped the most in seven months after weeks of sharp losses.
"We see prices averaging around $85 in 2015, so we have been advising customers to hedge when 2015 prices approach that level," said Bjarne Schieldrop, chief commodity analyst at SEB in Oslo.
Developments in Iraq also supported prices, as Islamic State fighters showed their strength despite an extensive air campaign by the United States and other Western and regional powers.
Militants carried out a series of attacks in Baghdad on Thursday, killing at least 47 people. Islamic State has consolidated its position in the western province of Anbar in recent weeks.
"There's an added risk premium now that Islamic State is only 20 km away from Baghdad," said Schieldrop.
Iraqi pilots from the era of former president Saddam Hussein have joined Islamic State and are flying captured fighter jets in Syria, a group monitoring the war said, indicating co-operation between the radical Sunni group and former military officers.
Analysts said oil was in a downtrend in the longer term.
"Oil prices are likely to resume their downswing after this brief interlude because market participants will doubtless take advantage of the higher price level to jettison their long positions," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt.
Leading oil analysts across Wall Street have raced this month to slash their price forecasts by as much $12 a barrel as old assumptions about Saudi Arabia's readiness to defend a $100 crude are radically revised.
The head of Kuwait's national oil company on Wednesday said that the oil-rich Gulf country had no plans to cut output, even as prices fell below $83 a barrel.
Libya called for output cuts on Friday, but remains the only African OPEC member, out of four, to do so.
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