Oil prices climb as fears build of a coming supply squeeze
NEW YORK (Bloomberg) - Oil reversed losses as investors shifted focus from a potential resurgence of Covid-19 outbreaks and toward supply-and-demand fundamentals.
Crude futures in New York rose about 1% on Monday after earlier falling as much as 5.2%. The recovery came as equity markets pared losses. Iraq cut term oil sales to multiple Asian and European refiners, according to people familiar with the matter.
“Even as the global markets are in the grips of a resurgence of risk aversion tied to new Covid outbreaks in China and the U.S., oil fundamentals are still moving in the right direction,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas.
Crude’s six-week rally fizzled on Friday amid concerns the worst of the virus isn’t yet over and as the U.S. Federal Reserve warned the pandemic could inflict lasting damage on the American economy. BP Plc’s announcement on Monday that it will write down the value of the business by the most in a decade reinforced the picture of an industry in turmoil.
“Fear has started sprouting again,” said Bjornar Tonhaugen, head of oil markets at consultant Rystad Energy A/S in Oslo. “Concerns that we may be seeing the beginning of a second wave of the pandemic are dominating trading floors.”
West Texas Intermediate crude for July settlement rose 23 cents to $36.49 a barrel at 12:46 p.m. on the New York Mercantile Exchange. Brent for August delivery gained 52 cents to $39.25 on the ICE Futures Europe exchange after dropping 8.4% last week.
There are signs that the physical oil market is tightening.
“China’s economy is recovering, OPEC producers are cutting the supply of the their July barrels,” Tchilinguirian said. “These trends are positive for oil, helping to at least partially buffer it from broader risk-related developments.”
OPEC and its allies have agreed to maintain production cutbacks amounting to about 10% of global supply into next month, and will hold committee meetings on Wednesday and Thursday to assess their impact.
Saudi Arabia will deliver between 10% and 40% less crude than requested to seven refiners in Asia in July, according to refinery officials who asked not to be identified. Iraq, which has typically lagged in implementing its agreed cuts, instructed BP to reduce output by 10% at the country’s biggest oilfield.
“The U.S. shale patch will be very important for global balances and will influence what Saudi and Russia do on the month-to-month extension of their deal,” said Tamar Essner, director of energy and utilities at Nasdaq.
On the demand side, Chinese official figures showed refinery runs in Asia’s largest economy rose last month on a year-over-year basis. Refineries processed 13.69 million barrels a day in May, according to Bloomberg calculations based on figures from the nation’s statistics bureau. That was 7.5% higher than in April and 8.2% more than a year earlier.
Other oil-market news:
- Once the global oil market emerges from the coronavirus crisis, it may be greeted by a surprising change: greater dependence on crude from OPEC.
- While Chinese domestic flights have rebounded, the busy concourses don’t extend to the international terminals, signaling a long and slow recovery for airlines, the refiners who produce jet fuel and oil prices.
- The cost of hiring a supertanker to transport or store crude oil has slumped in the past few weeks, hurting traders and charterers who locked in rates earlier in the year via longer-term arrangements.
