The recent sharp rally in prices is incentivizing traders to take oil out of storage and meet increased demand, one analyst said.
Photo: Chris Ratcliffe/Bloomberg NewsOil prices ended higher after a volatile session Wednesday, lifted by an agreement between Saudi Arabia and Russia to extend supply cuts through July.
U.S. crude futures for July delivery advanced 1.3% to $37.29, extending a recent recovery that has sent prices to their highest level since early March. After starting the year above $60, crude prices tumbled below $0 for the first time ever on April 20 with traders unable to find available storage for oil. They have since rebounded with demand rising as countries ease coronavirus lockdowns and large producers slashing output.
Prices swung Wednesday as traders parsed conflicting reports about whether Organization of the Petroleum Exporting Countries, de facto led by Saudi Arabia, and partners like Russia would extend output cuts and when a deal might be announced. OPEC delegates eventually said that Saudi Arabia and Russia have agreed to continue historic cuts of 9.7 million barrels a day through July and to revisit the output curbs every month.
The world’s largest crude exporters had collapsed prices earlier in the year by raising output during a production feud as demand tumbled. The two countries are still completing a deal among a 23-country coalition known as OPEC-plus. The pact could be jeopardized if alliance members including Iraq and Nigeria are unwilling to make up for their lack of compliance with the recent curbs, the delegates said.
OPEC’s supply cuts, as well as reductions by North American producers in response to ultralow prices, have restored traders’ confidence in the oil market.
“The performance of OPEC+ has been brilliant,” with the group and its allies abiding by production quotas more strictly than under previous agreements, said Rystad Energy analyst Paola Rodríguez-Masiu.
Brent crude futures for delivery in August, the global gauge of oil prices, ended the day up 0.6% at $39.79 a barrel. Early in the session, they climbed above $40 for the first time in about three months.
The output curbs have created a shortage of new crude at a time when Asian refiners are snapping up barrels of oil. Major economies in the region have eased lockdown measures and restrictions on work and travel, prompting renewed demand for gasoline and jet fuel.
The sharp rally in prices is acting as an incentive for traders to take oil out of storage and meet this demand, according to Chris Midgley, director of analytics for S&P Global Platts.
“It’s feeling a little bit too strong and that there could be a correction,” Mr. Midgley said. One reason: Higher prices are already encouraging some smaller North American companies to turn the taps back on.
For EOG Resources Inc., the strategy for the second half of the year will be “to really accelerate our production into what we see as a price recovery,” said Kenneth Boedeker, the company’s executive vice president for exploration and production, on Tuesday.
Fellow Texas producer Parsley Energy Inc. plans to bring most of the 26,000 barrels a day it throttled in May back online this month.
A resumption of drilling could add to a glut of oil that accumulated in the U.S. during the pandemic. Commercial crude-oil inventories declined by 2.1 million barrels last week, the Department of Energy said Wednesday. Still, they stood 12% higher than the average for this time of year at 532.3 million barrels. And stockpiles in the Strategic Petroleum Reserve rose, as did inventories of gasoline and distillates, indicating excess supply of fuel.
Higher crude prices are also squeezing profits at refineries. As long as they are struggling to make money, refineries will keep purchases of crude to a minimum and sell down stockpiles of gasoline and diesel they accumulated during the pandemic, said Helge André Martinsen, oil analyst at DNB Markets.
The gap between gasoline and crude prices, a proxy for the money refineries earn from making the car fuel, has dropped 13% over the past month to $10.05 a barrel. “It’s a bit of a worrying sign,” Mr. Martinsen said.
Although demand for oil has started to recover as lockdowns are relaxed, traders expect it will take a long time to go back to pre-coronavirus levels. At one point in April, demand was down by around 30%, according to Ben Luckock, co-head of oil trading at Trafigura Pte. Ltd. Around half of that has returned, but the remainder will be harder to restore, he said.
“It gets a little bit more difficult and slower from there,” Mr. Luckock said in an interview last week.
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Write to Joe Wallace at Joe.Wallace@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com
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