Oil jumped nearly 20% on Thursday, accelerating its recent rally as the Street eyed continued production cuts and rising U.S.-Iranian tensions.
West Texas Intermediate, the U.S. benchmark, rose 19.7%, or $2.72, to settle at $16.50 per barrel. WTI did close off the highest level of the day, however, after hitting $18.26 in mid-morning trading. Brent crude, the international benchmark, gained 96 cents, or 4.7%, to settle at $21.33.
On Wednesday, WTI jumped 19.1% — one of its best days on record. In just two days, from Tuesday's settle of $11.57 to Thursday's settle WTI has gained 42.6%. Given oil's more than 70% decline this year a smaller gain, of course, now accounts for a much larger percentage move.
The rise was fueled in part by President Donald Trump's threat that the U.S. would "destroy" any Iranian gunboats that harass American ships in the oil-rich Persian Gulf, said Bjornar Tonhaugen, head of oil markets at Rystad Energy.
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 about a third of global demand. At the beginning of the year, WTI traded above $60. On Monday for the first time in history, WTI plunged into negative territory, as storage facilities filled up. The May contract was about to expire and therefore was thinly traded, but the move was nonetheless notable.
"The ultimate complication is that storing oil costs money, and storage facilities aren't unlimited," Howard Marks, co-founder of 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 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 said.
But supply is only one side of the equation. 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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