Crude Leaps More Than 20% on Hopes Price War Will End -- Update
02 April 2020 - 11:02PM
Dow Jones News
By David Hodari and Sarah Toy
U.S. oil prices jumped 25% Thursday in their biggest one-day
rally on record, lifted by investors' hopes that initial steps to
end a global price war will offer a reprieve to an industry
battered by coronavirus.
The gains capped a wild day of trading, in which an early climb
accelerated after President Trump tweeted that he expected Russia
and Saudi Arabia to agree to cut production by millions of barrels
a day. Prices then soared as much as 35% before turning lower after
the Kremlin denied talking to the Saudis. The climb then stabilized
after Saudi officials said the kingdom would consider substantial
output cuts as long as others in the G-20 group of nations were
willing to join the effort.
While investors still expect the coronavirus crisis to deliver a
heavy blow to global oil demand, Thursday's news offered a glimmer
of hope that major producers can avoid a protracted conflict,
lifting shares of beleaguered energy companies. Energy shares have
been the best-performing group in the S&P 500 so far this week.
On Thursday, shares of Exxon Mobil Corp. rose 7.6% and Chevron
Corp. advanced 11%.
"This is a positive surprise for the market, but we're still a
long way off from seeing actual material cuts," said Gary Ross,
chief executive of Black Gold Investors LLC. "Demand is still being
devastated."
U.S. crude oil closed up $5.01, or 25%, at $25.32 a barrel,
logging its sharpest percentage gain on record, according to a Dow
Jones Market Data analysis of figures going back to 1983. Brent
crude, the global gauge of prices, rose $5.20, or 21%, to $29.94,
also recording its best day ever in data going back to 1988.
The gains marked a rare bright spot for oil prices in recent
weeks. Both Brent and U.S. crude are still down more than 50% so
far this year, leaving many traders skeptical that production cuts
alone can lift prices back near recent highs.
Capping traders' enthusiasm: oil storage is rapidly filling up
while demand for fuel has plummeted, with swaths of the globe
shutting down all but essential services in an effort to combat the
spread of the coronavirus. Factories have closed and restaurants
have shuttered. Airlines are scaling back on flights and people
aren't driving. Many expect a deep recession world-wide. Investment
banks and commodities trading houses have slashed their forecasts
for daily global oil demand by tens of millions of barrels.
A truce between the Russians and Saudis would do little to shift
those dynamics, many analysts said, and might even cause greater
problems.
"It's physically impossible for Saudi Arabia and Russia to get
10 million barrels a day off the market -- they'd burst their
onshore storage and fill every ship in sight," said Edward
Marshall, a commodities trader at Global Risk Management. "Even
with OPEC on board, that's a phenomenal amount of oil, and it'll be
very difficult to get everyone on side."
The slide has hit energy companies hard, pushing many to the
brink and dashing others' plans to restructure their operations.
Shares of Exxon and ConocoPhillips have both shed more than 40% of
their value so far in 2020. Earlier this week, U.S. shale driller
Whiting Petroleum Corp. filed for bankruptcy protection, becoming
the first sizable fracking company to succumb to the crash in oil
prices.
Some other shale producers have asked Texas regulators to
consider limiting the state's output for the first time in decades.
Texas Railroad Commissioner Ryan Sitton said on Twitter late in
Thursday's session that he had spoken with Russian energy minister
Alexander Novak about coordinated cuts globally of 10 million
barrels a day.
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
and Chevron are expected to attend.
Investors were hopeful that Mr. Trump's tweets signaled a thaw
in the price war, which began in early March, after the Saudi-led
Organization of the Petroleum Exporting Countries and a group of
other oil-producing countries dominated by Russia failed to deepen
production cuts by 1.5 million barrels. But some analysts doubt
that coordinated cuts of the size he described Thursday are even
possible.
"It's highly unlikely these parties would agree to these cuts,"
said Spencer Welch, director of oil markets at IHS Markit. "It's
not just [requiring] the Russians coming back and offering
significantly more cuts than at the last OPEC+ meeting, but you've
also got hundreds more producers across the U.S. needing to pass
the legislation to enforce those cuts."
The two periods of the sharpest oil inventory builds in recent
years were in early 2005 and early 2015, when stocks rose by around
400 million barrels, according to IHS Markit data. But currently
IHS expects global oil inventories to rise by three times that
amount in the first half of this year.
Fears that stockpiles will reach their limit in the coming
months are another factor keeping some analysts cautious.
"There is some part of cautious optimism in me but it's deeply
entangled with a potential economic recovery and the uncertainties
around that," said Marwan Younes, chief investment officer at
Massar Capital Management, a New York-based hedge fund.
--Amrith Ramkumar contributed to this article.
Write to David Hodari at David.Hodari@dowjones.com and Sarah Toy
at sarah.toy@wsj.com
(END) Dow Jones Newswires
April 02, 2020 17:47 ET (21:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.