WTI prices are still around 42% below their average prevailing levels before the June peak last year. However, prices have recovered by just under 19% since their January low despite, the fact that the oil market fundamentals have only changed marginally and the market is still oversupplied.

Five reasons

Barclays PLC notes that there could be five key reasons for the better-than-expected rally. First off, the oil market adjusted to the low price environment faster than expected. While stock builds are still expected throughout the year, the most average quarterly stock build came in below expectations. The most recent quarterly stock build was revised down from 1.25 million barrels per day to on 0.66 million barrels.

Secondly, Barclays estimates that the better-than-feared 2015 supply imbalance was worth about 18% for oil prices. The bank estimates that WTI prices could have received a boost of around $10 per barrel thanks to the improving supply imbalance.

Oil - OPEC share

OPEC’s market share has also increased since the oil slump last year. As OPEC production, driven by Saudi Arabia, has remained elevated, non-OPEC supply growth has slowed. As a result, OPEC’s share of production rose 0.5pp from Q4 14 to Q2 15, explaining 3.7% of the oil price move this year.

What’s more, the sliding value of the dollar has had an effect on prices. According to Barclays’ model, the beta of oil prices to the US dollar is 1.0, reflecting the fact that oil is priced in dollar terms. The trade-weighted US dollar is down nearly 6% since the peak in March, lifting oil prices a commensurate 6% in dollar terms.

And finally, the rise in speculative CFTC positions explains another 4.7% of gains. Short covering has led to speculative positions rising from the lows in late March to levels last reached in July 2014. WTI net speculative longs as a % of open interest rose from 9.4% on March 24 to 14.5% last week.

Oil - Equities have rallied notably after troughs

Barclays notes that the collapse in oil prices led to a commensurate fall in inflation expectations. Also, the US ten-year yield has followed the historical pattern of rates around past oil sell-offs:

"History and still weak oil market fundamentals suggest that the fixed income sell-off is nearing an end. The fall in rates that is typical in oil sell-offs tends to be fairly sticky around levels that are 15% lower than pre-oil collapse levels. This pattern implies a level of 2.20% for the US 10y, which is in line with our year-end forecast of 2.25%." -- Barclays research

Moreover, there’s evidence to suggest that following the period of low oil prices, equities are set for a period of strong performance. The data shows that in past episodes the S&P 500 rallied an average of 11% after oil prices troughed. Current trends show that, in terms of sectors, consumer discretionary has outperformed by about 6% since June. On average, consumer stocks have outperformed by 11% one year after oil troughs.

There could be more upside for stocks from present levels, despite recent volatility.