Oil Leaps on Hopes for Saudi-Russia Truce, U.S. Action
02 April 2020 - 03:11PM
Dow Jones News
By David Hodari
Crude prices jumped Thursday on hopes for a truce in the price
war between Saudi Arabia and Russia and the possibility of action
from the White House to mitigate the effects of last month's
vertiginous drops.
Brent crude oil, the global benchmark, rose 7.6% to $26.62 a
barrel in one of its sharpest rallies of recent years. West Texas
Intermediate futures, the bellwether of U.S. prices, rose 8.9% to
$22.11 a barrel. Both benchmarks have shed around 60% of their
value so far in 2020.
President Trump is set to meet Friday with the heads of some of
the largest U.S. oil companies to discuss measures to help the
industry as it fights for survival. The chief executives of Exxon
Mobil Corp. and Chevron Corp. are expected to attend. Mr. Trump
also said he was confident Saudi Arabia and Russia would resolve
their dispute over oil output and prices in the coming days.
Russian President Vladimir Putin said Wednesday that oil
producers should cooperate to mitigate the market decline, adding
that Moscow is discussing the condition of the oil market with
Washington and the Organization of the Petroleum Exporting
Countries.
The main driver of oil's rally was "the announcement by Trump
telling the world 'we've been talking with the Russians and the
Saudis and he's quite proud of these oil diplomacy efforts," said
Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad
Energy. "He's trying to save the U.S. industry from collapse."
The spat began in early March, after Saudi-led OPEC and a group
of other oil-producing countries dominated by Russia failed to
deepen production cuts by 1.5 million barrels.
But that amount pales in comparison with the size of the
collapse in oil demand over recent months, with government-mandated
lockdowns around the globe as a result of the coronavirus pandemic
grounding flights and keeping citizens in their homes.
Also boosting prices were reports that China is implementing
plans to buy up cheap oil to fill its strategic petroleum reserves.
Beijing may also start filling its commercial stocks as well,
according to Bloomberg.
The world's largest oil-consuming nation has close to one
billion barrels' worth of storage space, and could take on an extra
100 million barrels over the course of this year, according to data
from Rystad Energy.
"It's given some support to prices today," said Ehsan Khoman,
head of Middle East and North African research and strategy at
MUFG. With Saudi Aramco set to release its May official selling
prices in the coming days, "the question now becomes whether this
is going to mean the Chinese filling up to the brim and locking in
prices for May as well as April."
Oil-market watchers were still skeptical about the impact of any
end to the price war given the impact of the lockdowns on
demand.
"I don't think this meeting significantly changes things, the
oil market is still way out of balance and oil stocks are still
rising at an unprecedented rate," said Spencer Welch, director of
oil markets at IHS Markit. "Producers are going to have to
involuntarily cut production because there's going to be nowhere
for the oil to go."
Also attending the White House meeting will be Continental
Resources Inc. CEO Harold Hamm, who has called for the Trump
administration to intervene in the Saudi-Russian price war. Other
shale companies have called on state regulators to enforce
production cuts in Texas.
The two periods of the sharpest oil inventory builds in recent
years were in early 2005 and early 2015, when stocks rose by 400
million barrels, according to IHS Markit data. But IHS expects
global oil inventories to rise by three times that amount in the
first half of this year.
"Nothing like this has ever happened before or hit the oil
market like this and I don't think a supply cut by a couple of
companies will be enough," Mr. Welch added.
Oil storage around the world is beginning to fill up, prompting
some companies to enact production cuts. Brazilian state-owned
giant Petrobras last week became one of the first major companies
to announce such reductions.
Even with Thursday's rally, oil prices remain below the cost of
production for the U.S., Canada and Russia, and strategists are
forecasting further declines from here.
Crude will extend its plunge in the coming months, and Brent and
WTI could sink as low as $15.80 and $13.30 a barrel, respectively,
as the world's crude glut continues to build, according to Japanese
bank MUFG.
The prices of some grades -- such as landlocked crudes in the
U.S. and Canada subject to pipeline bottlenecks -- could even turn
negative, said MUFG's Mr. Khoman.
Write to David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
April 02, 2020 09:56 ET (13:56 GMT)
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