By Sharon Cho 

Oil traded above $60 a barrel in London amid the highest volatility in more than three years on speculation that Saudi Arabia, the largest crude exporter, is signaling confidence that prices will rally.

Brent futures swung between gains and losses. Saudi Arabia’s assumption of oil at $80 a barrel next year is sending a message that the government expects a price rebound, according to John Sfakianakis, a former economic adviser to the kingdom’s finance ministry. Implied volatility for at-the-money options this week increased to the highest since October 2011, data compiled by Bloomberg show.

Oil has slumped 46 percent this year, poised for the biggest drop since 2008, as the Organization of Petroleum Exporting Countries resisted supply cuts to defend market share while the highest U.S. production in three decades exacerbated a global glut. Crude prices are “fair” at about $70 to $80 a barrel, Iraq’s Oil Minister Adel Abdul Mahdi said.

“The market is fluctuating today as there’s less liquidity,” Will Yun, an analyst at Hyundai Futures Corp. in Seoul, said by phone today. “Uncertainties still linger in the market as OPEC and the U.S. haven’t signaled any output cuts or a slowdown in their production.”

Brent for February settlement was at $60.33 a barrel on the London-based ICE Futures Europe exchange, up 9 cents, at 4:54 p.m. Singapore time. The contract fell $1.45 to $60.24 on Dec. 24. The European benchmark crude traded at a premium of $4.23 to West Texas Intermediate. Prices are down 1.7 percent this week, set for a fifth weekly decrease.

Saudi Budget

WTI for February delivery was 31 cents higher at $56.15 in electronic trading on the New York Mercantile Exchange. It slid $1.28 to $55.84 on Dec. 24. The volume of all futures traded was about 38 percent below the 100-day average.

The Saudi government is probably assuming an oil price of $80 a barrel for 2015, down from this year’s $103, said Sfakianakis, the Middle East director at Ashmore Group Plc, an asset manager in London. Oil accounted for 89 percent of the nation’s 2014 revenue, according to the finance ministry.

Saudi Arabia is confident that crude prices will rise as global economic growth boosts demand, while high-cost producers cut back, Oil Minister Ali Al-Naimi said on Dec. 21.

Iraq this week approved a budget based on oil at $60 a barrel. The government in Baghdad accepted the “Saudi theory” that OPEC should protect its market share and let prices drop to reduce output elsewhere, Oil Minister Abdul Mahdi said in an interview yesterday.

Libya Conflict

OPEC, whose 12 members supply about 40 percent of the world’s oil, decided at a Nov. 27 meeting to maintain its production target at 30 million barrels a day. The group pumped 30.56 million a day in November, exceeding its target for a sixth straight month, a Bloomberg survey of companies, producers and analysts shows.

In Libya, the Petroleum Facilities Guard called in air strikes on Islamist militias that it said had shelled the country’s largest oil port at Es Sider. Libya’s output has declined to 352,000 barrels a day, compared with as much as 900,000 a day in October, according to Mohamed Elharari, a spokesman at state-run National Oil Corp.

Implied volatility for at-the-money options in the front-month Brent contract, a measure of expected futures movements and an indicator of options value, climbed to 49.9 percent this week, data compiled by Bloomberg show. It’s at about 47 today. WTI’s volatility is also near the highest since October 2011.

To contact the reporter on this story: Sharon Cho in Singapore at ccho28@bloomberg.net

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Yee Kai Pin, Aaron Clark

www.bloomberg.com