Oil futures rallied Thursday after the International Energy Agency reported global crude demand was outpacing supply and Saudi Arabia's energy minister said his country was prepared to help the market rebalance.

NYMEX September crude settled $1.78 higher at $43.49/b. ICE October Brent settled up $1.99 at $46.04/b.

NYMEX September ULSD settled 6.65 cents higher at $1.3849/gal. NYMEX September RBOB settled up 6.03 cents at $1.3617/gal.

Crude oil inventories should see a "hefty draw" this quarter after a "lengthy stretch of uninterrupted builds," the IEA said Thursday in its latest monthly report.

While the IEA's forecast of a tighter crude market helped lift oil futures Thursday, the Paris-based organization cautioned prices will likely face resistance from the large accumulation of crude in storage.

"The massive overhang of stocks is also keeping a lid on prices, with both newly produced and stored crude competing for market share in an increasingly volatile refinery margin environment," the IEA said.

Moreover, the IEA's revisions to its 2017 outlook for supply and demand compared with last month's report were "clearly bearish," Citi Futures and OTC Clearing analyst Tim Evans said.

In an interview distributed Thursday, Khalid al-Falih, Saudi Arabia's energy minister, said that the global market was rebalancing, but added that current low oil prices were "unsustainable."

OPEC ministers will consider "any possible action that may be required to stabilize the market" when the group meets informally next month, Falih said, according to remarks carried by the Saudi Press Agency.

That meeting is scheduled to take place on the sidelines of the International Energy Forum in Algeria on September 26-28.

Falih's comments helped move oil prices higher, though analysts remained skeptical the Algeria meeting will produce results coming one day after OPEC's monthly report showed Saudi Arabia pumped a record 10.67 million b/d in July.

Oil futures found additional support Thursday afternoon when news broke about a large fire at the 235,000 b/d Motiva-operated refinery in Convent, Louisiana.

Product futures touched intraday highs in the wake of the refinery fire, which led to the evacuation of all employees and contractors.

NYMEX September ULSD rose 5.7% to $1.3934/gal at one point and NYMEX September RBOB surged 5% to $1.3668/gal.

The issues seemingly behind Thursday's rally "stretched the imagination" whether they were indeed bullish, according to Robert Yawger, director of the futures division at Mizuho Securities USA.

The day could best be described as a "short-covering rally" when traders betting on further price declines rushed to exit their positions, causing prices to keep rising, he said.

Escalating tension between Ukraine and Russia was also supportive, he said.

Ukrainian troops were on high alert Thursday after Russia accused Kiev on Wednesday of launching an attack in the Crimea, CNN reported.

CRUDE OPTIONS

Following Thursday's rally, oil futures climbed further above the recent multi-month lows set August 2 when NYMEX crude settled at $39.51/b and ICE Brent settled at $41.80/b.

A rebound in the futures market has coincided with drop in implied volatility in the NYMEX crude options market.

Implied volatility can be seen as a proxy for the cost options, meaning option premiums have fallen alongside an increase in oil futures.

Implied volatility stood at 38.63% Thursday, down from 43.07% August 2, which was a high going back to April 15, according to calculations by data supplier CQG using the three most prompt contract months.

BNP Paribas analysts said in a note this week they expect oil prices to weaken, but that alone might not be enough to push implied volatility higher.

An inverse relationship exists between oil futures and implied volatility, but crude prices are likely to decline in an "orderly" fashion, and that should mitigate any rise in implied volatility, they said.

--Geoffrey Craig, geoffrey.craig@spglobal.com

--Edited by Derek Sands, derek.sands@spglobal.com

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