Oil rallies on hopes of more OPEC cuts amid flaring Gulf tensions

Price of oil spiked despite growing evidence that no amount of output cuts will offset demand destroyed by coronavirus.

Oil texas
The Permian Basin in Texas, the United States, where on Thursday the price of oil recovered after dipping to historic lows earlier in the week on hopes of more output cuts from oil-producing nations to offset the global glut in supply [File: Angus Mordant/Reuters]

Oil soared on Thursday, extending its rebound after major oil-producing nations said they would accelerate planned production cuts to combat the dramatic slump in demand due to the COVID-19 pandemic.

Crude prices have had one of their most tumultuous weeks ever. United States West Texas Intermediate (WTI) crude futures closed at -$37.63 on Monday, in the worst selloff for that contract in history. Global benchmark Brent crude was slammed on Tuesday, hitting a two-decade low before rebounding.

Since the start of the year, both benchmarks have lost more than two-thirds of their value. Fuel demand is down about 30 percent worldwide in April, and supply will outstrip demand for months to come due to the pandemic.

Brent rose $1.08, or 5.30 percent, to $21.45 a barrel by 3:21pm Eastern Daylight Time (19:00 GMT), while WTI jumped $3.07, or 22.28 percent, to $16.85.

The Organization of the Petroleum Exporting Countries and other oil-producing nations, a grouping known as OPEC+, agreed this month to cut output by a record 9.7 million barrels per day, around 10 percent of global supply, to support oil prices, but prices continued to decline.

Kuwait said on Thursday it had begun cutting oil supply to the international market, ahead of the May 1 date when the deal was supposed to take effect.

Whether that will be sufficient to offset weak demand is unclear. Rystad Energy cut its forecast for oil demand in 2020 to 89.2 million bpd, a 10 percent decline from 2019. Last week, the energy consultant projected demand would fall to 90.3 million bpd in 2020.

Russia is looking for options to cut its production and may go as far as burning its own oil, sources said. Its production has not changed much from March until now.

The market was also higher after US President Donald Trump said he had instructed the US Navy to fire on any Iranian ships that harass it in the Gulf, although he added later he was not changing the military’s rules of engagement.

“Threats by US President Donald Trump to destroy Iranian gunboats if they harass US navy ships boosted the possibility of renewed tension in the Middle East, a major oil-producing region, which traders always translate to reductions in the region’s production and exports if things escalate,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy.

The head of Iran’s Islamic Revolutionary Guard Corps said Tehran will destroy US warships if its security is threatened in the Gulf.

Iran also summoned its Swiss ambassador in Tehran, who represents US interests in the country, Iran’s Foreign Ministry spokesman Abbas Mousavi said on Thursday, according to the IRIB news agency.

“This ratchets up tensions once again between the US and Iran. However, given the glut we have in the oil market, it is difficult to see this offering lasting support to the market, unless the situation does escalate further,” said Warren Patterson, ING’s head of commodities strategy.

Source: Reuters