Oil Recovers After Furious Selloff But Still Struggles With Glut

(Bloomberg) -- Oil recovered from a 21-year low, bucking two days of frenzied selling, but a global supply glut continues to loom over the market.

Brent futures for June delivery closed 5% higher after slumping as much as 17% earlier in the day. West Texas Intermediate crude also gained in New York, ending the day 19% higher following an unprecedented plunge into negative territory on Monday. The market, already inundated with bearish signals, shrugged off a U.S. government report showing that the four-week average for American petroleum demand was at a record low last week while crude stockpiles were at a three-year high.

News that U.S. President Donald Trump authorized the Navy to shoot down Iranian gunboats may have buoyed prices, but crude is not out of the woods yet, according to Robert Yawger, director of the futures division at Mizuho Securities USA. “It could potentially get worse because of the fact that storage is not all that far away from being full,” he said.

Prices near or below zero are expected to persist until producers begin shutting in production at a level that will offset the unprecedented demand collapse caused by the coronavirus pandemic. ICE Futures Europe Ltd. confirmed on Tuesday night that it has taken steps to prepare for negative Brent pricing. Meanwhile oil traders are rewriting their risk models to accommodate potentially limitless declines.

“The only way you’re going to balance this market is for prices to go to levels to get supplies to shut,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in an interview on Bloomberg Radio. “We’ve been calling for $10 Brent for a while, and we’ve absolutely looked at single digit prices.”

Even OPEC+’s historic deal to slash production by 10 million barrels a day in May won’t be enough to offset the demand destruction from the virus in the short-term, which could be as high as 30 million barrels a day.

In the U.S., the worlds biggest oil producer, operators have started shutting wells and halting drilling -- steps that could cut output by 20% and leave thousands of workers unemployed. Some 1.75 million barrels a day is at immediate risk of shutting down while the number of new wells being brought online is forecast to plunge almost 90% by the end of the year, according to IHS Markit Ltd.

Markets are also having to grapple with a wave of volatility spurred by exchange-traded funds. Two such funds sold about 20% of the June WTI open interest on Tuesday, according to Bloomberg calculations. The United States Oil Fund said Wednesday it may roll more of its WTI contracts forward due to extraordinary market conditions.

There are signs that the stunningly low prices are here to stay as supply dwarfs consumption. Royal Vopak NV, the world’s biggest independent storage company, said almost all of its space is sold, while Clarksons Platou said floating storage is filling at an “unprecedented pace.” Traditional oil bull Pierre Andurand warned crude could tumble below zero again and described the market as dangerous to trade in.

The Dated Brent benchmark, a global reference for almost two-thirds of the world’s physical flows, plunged to $13.24 a barrel on Tuesday, the lowest since 1999, according to price reporting service S&P Global Platts. On Wednesday it was assessed at $14.21 a barrel, Platts said. With the price so low, key European and African crude streams including Urals and Bonny Light will now sell under $10, as they trade at a discount to the marker.

“The dive below zero was more than just a technical quirk and could repeat itself if storage constraints intensify,” said Stephen Brennock, an analyst at broker PVM Oil Associates in London.

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