Oil spikes on surprise cuts to U.S. oil production

By Robert Gibbons

NEW YORK (Reuters) - Oil prices surged more than 5 percent Monday, continuing a three-day rally that has erased August' s price declines, after U.S. oil production data showed output falling and OPEC said it would talk with other producers about low prices.

Crude futures rebounded after retreating early Monday, in a market with limited liquidity on a U.K. bank holiday. Prices spiked as new U.S. government figures indicated production was lower than initially reported for the first half of the year.

U.S. domestic crude oil production peaked at just above 9.6 million barrels per day (bpd) in April before falling by more than 300,000 bpd over the following two months, Energy Information Administration (EIA) data showed on Monday..

Fueled by the data, prices rebounded and resumed the short-covering rally that began late last week.

"With the worst of the bad news priced in following last weeks capitulation trade, a very shorted oil market has traders running for cover," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland. "We continue to believe the pressures that have created this downdraft for oil prices are beginning to deflate and subside. Aggressive short traders are now paying the price."

Excess supply has weighed on oil, with the Organization of the Petroleum Exporting Countries' forecasts pointing to an oversupply of more than 2 million bpd.

The rally was boosted further as OPEC expressed concern on Monday about oil's price drop and said the group is ready to talk to other producers about it. Since November, OPEC countries led by Saudi Arabia have kept production high to maintain market share, even as prices have plummeted.

The largest synthetic crude oil producer in Canada also halted output after a fire, causing Canadian light crude prices to spike, further pressuring the market.

"There's extreme volatility, with London out and the market is rallying on the OPEC headline," said Scott Shelton, commodities specialist at ICAP in Durham, North Carolina, referring to a bank holiday in Britain.

Brent October futures rose $2.86 to $52.91, a 5.71 percent gain, by 1:20PM EST (17:20 GMT). U.S. crude rose $2.82 to $48.04 per barrel.

The spread between the two benchmarks narrowed to $4.87 after widening to $5.07.

At Monday's peak, Brent was up 22 percent from last Wednesday's settlement, the biggest three-day percentage gain since January 2009.

U.S. crude's 24 percent gain also was the biggest three-day percentage gain since January 2009.

(Additional reporting by Alex Lawler in London and Keith Wallis; Editing by Marguerita Choy)