Oil jumps 18%, extending Wednesday’s rally as traders bet on US production cuts

Oil jumped more than 20% on Thursday, accelerating Wednesday’s rally, as the Street eyed continued production cuts, as well as rising tensions in the Middle East.

West Texas Intermediate, the U.S. benchmark, rose 21.4%, or $2.95, to trade at $16.73 per barrel. Brent crude, the international benchmark, traded 9.4% higher at $22.29 per barrel.

Thursday’s move higher comes after WTI jumped 19.1% on Wednesday for one of its best days on record.

President Donald Trump said Wednesday in a tweet that the U.S. would “destroy” any Iranian gunboats that harass American ships, which Bjornar Tonhaugen, head of oil markets at Rystad Energy, said contributed to oil’s jump. The Middle East is key to the oil trade, so any possible tumult can impact the worldwide flow of crude.

There was also optimism in the market that with oil prices at historic lows, producers will continue to scale back on production and shut-in wells. Oklahoma regulators said they would help producers shut wells without taking away leases, which Tonhaugen said was “a relief for producers that want to cut some output but were hesitating due to regulatory consequences.”

But oil’s strength over the last two days has done little to dent crude’s enormous 75% loss this year as the coronavirus pandemic sapped around one third of global demand. At the beginning of the year WTI traded above $60. On Monday for the first time in history, WTI plunged below zero into negative territory. The contract in question was about to expire and therefore was thinly traded, but the move was nonetheless notable.

Analysts are warning that storage around the world is quickly reaching capacity, which has also pressured prices in recent weeks.

“The ultimate complication is that storing oil costs money, and storage facilities aren’t unlimited,” Howard Marks, who co-founded Oaktree Capital Management, told CNBC in an email. “Right now storage is scarce and thus expensive, so it’s not worth it to buy oil today and store it. The cost of storing exceeds the value today; thus the price is negative.”

As the June WTI contract nears expiration on May 19, some are warning that it could plunge in the same way that the May contract did. 

“June could see storage tanks struggling to come off highs, in which case the days leading to expiry next month could see yet another squeeze,” Francesco Martoccia, senior associate in commodity research at Citi, wrote in a note to clients.

Data from the U.S. Energy Information Administration on Wednesday showed that storage in Cushing, Oklahoma — the hub for WTI delivery — rose by about 10% in a week to 59.7 million barrels, about 25 million barrels shy of its capacity.

Traders say that this will lead to natural shut-ins since there will soon be nowhere for oil to go.

“There is an inflection point coming for Cushing stocks (and global stocks), but their exact timing is tricky. US oil production is falling quickly even now,” Martoccia added.

But supply is only one side of the equation, and Tonhaugen warned that until demand recovers any gains could be short-term.

“The only concrete development that could give prices a boost that can last is either a rebound in demand, when lockdowns are scrapped and industrial activity ramps up, or a generous and unprecedented production cut, in addition to what OPEC+ decided,” he said.

– CNBC’s Michael Bloom, Patti Domm and Tanvir Gill contributed reporting.

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