Crude prices rebounded on Wednesday after United States President Donald Trump said on Twitter that he had instructed the US Navy to destroy Iranian gunboats “if they harass our ships at sea.”
Brent crude futures, the global benchmark for oil markets, climbed 6.3 per cent to $20.55 a barrel in volatile trading, after sliding to their lowest since 1999 in Asian trading hours. West Texas Intermediate futures—the US benchmark—rose 17.3 per cent to $13.59 a barrel, after plummeting 43 per cent on Tuesday to close at its lowest price in 21 years.
The Wall Street Journal reports that despite large per cent moves, prices remain low.
“It’s a geopolitical piece of news that has lifted the price at a time when the market has been heavily sold,” said Ole Hansen, head of commodity strategy at Saxo Bank.
That came two days after one WTI contract turned negative for the first time in history, with sellers paying buyers to take away their barrels.
While oil futures prices have collapsed this week, the price of a physical barrel of oil is even lower. A real-life barrel of Brent crude oil cost $13.24 late Tuesday, its lowest price since March 1999, according to S&P Global Platts.
This week’s crushing fall in the value of oil has reverberated across energy markets, hitting the value of oil companies and the debt they issue. If oil prices stay at such a low level, the loss of revenue is likely to create widespread financial and political pain for countries reliant on petroleum production.
Government measures keeping billions of citizens at home in an attempt to stymie the spread of the coronavirus pandemic have decimated oil demand. Compounding the problem was a massive overproduction of crude during a price war last month between Saudi Arabia and Russia.
The war has called a truce, but now the world is essentially swimming in oil that nobody needs. Oil producers have been reluctant to shut down because doing so quickly could cause long-term damage to their wells.
Storage capacity has appeared to reach its limit, prompting this week’s massive selloff.
“We could see unexpected methods of storage coming into play if they can’t store it in the traditional pipeline system,” said Richard Fullarton, founder of London-based private fund manager Matilda Capital Management Limited. “They may have to store it in on-land pond facilities or cap a whole tranche of wells.”
Industry data underscored the massive oversupply. American Petroleum Institute data from late Tuesday showed a 13.2-million-barrel increase in US oil inventories in the most recent reporting week.
If US Energy Department data due Wednesday are similar to the API’s, it will be the fourth straight week that US inventories have risen by more than 10 million barrels.
Free commercial oil storage capacity has dwindled to around 130 million barrels out of an estimated 1.38 billion barrels of space, according to cargo-tracker Kpler, although logistical bottlenecks mean not all that capacity can be used.
The shock to oil prices has reverberated through broader markets, sending stocks of oil producers down. Debt issued by energy companies has also sold off sharply, indicating the rising risk of a wave of defaults, something that could infect other high-yield borrowers, said Seema Shah, chief strategist at Principal Global Investors. U.S. oil companies are among some of the largest issuers, making up about 12 per cent of high-yield bond indexes.
“With oil prices so low, they are going to be under so much pressure right now that you almost have a contagion effect from energy to high yield,” she said.
Some oil company shares stabilised on Wednesday. Royal Dutch Shell and BP were both flat.
– The Wall Street Journal