Oil prices rallied again on Wednesday on signs of improving crude demand and a drawdown in United States crude inventories, but gains continued to be capped by concerns over the economic fallout from the coronavirus pandemic.
Global benchmark Brent crude settled up $1.10, or 3.2 percent, at $35.75 per barrel, while July US West Texas Intermediate (WTI) crude futures ended up $1.53, or 4.8 percent, at $33.49. WTI’s June contract expired on Tuesday, up 2.1 percent, avoiding the mayhem of expiry in May, when prices crashed to negative $40 a barrel over concerns about rapidly evaporating crude storage.
Fears of disappearing storage continued to ease on Wednesday after the US Energy Information Administration (EIA) reported US crude inventories fell by 5 million barrels last week, while stocks at the oil storage hub at Cushing, Oklahoma dropped by 5.6 million barrels.
The positive news is feeding hopes that the worst damage from the recent dramatic crash in oil prices has already registered. In the US, companies that provide drilling equipment and services have taken a major beating in recent weeks as oil and gas explorers slam the brakes on drilling and shut-in wells.
On Wednesday, oilfield services provider Halliburton Co slashed the quarterly dividend it pays to shareholders by 75 percent in the latest move by a US energy firm to preserve cash. Rival Schlumberger cut its dividend in April.
Fuel demand has continued to gradually tick upwards in recent weeks as governments worldwide begin to ease coronavirus restrictions. Shipping data also shows that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are complying with an agreement they made last month to cut output by 9.7 million barrels per day (bpd).
Meanwhile, market forces have compelled US crude producers to tighten the taps, with production now 1.6 million bpd below its March peak. Production in North Dakota has dropped by more than half a million bpd.
“This sustained decline comes despite the partial rebound in oil prices over the past few weeks, suggesting that producers are still reeling from the price crash last month (and perhaps do not share the wider markets’ optimism that the worst is over),” Bethany Beckett, assistant economist at Capital Economics, wrote in a note on Wednesday.
Analysts warn that weak crude refining profits could delay a recovery in demand. And while EIA data showed that US gasoline and distillate inventories rose last week, lingering concerns about the economic fallout from the coronavirus pandemic, especially in the US, continue to keep a lid on gains.
“The game’s cards are all turned open now,” said Paola Rodriguez-Masiu, a senior oil market analyst at Rystad Energy. “The main obstacles, such as the storage’s capacity wall, are now behind us. What will determine how prices will move from now on is how narrow the supply-demand gap is on any given week.”