Oil prices surged for a second day Thursday as the market digests a flareup of tensions in the Middle East and looks ahead to production cuts from the world’s largest producers.
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West Texas Intermediate crude oil, the U.S. benchmark, surged 28 percent to $17.66 barrel while Brent crude, the international benchmark, was higher by 10 percent at $22.40.
“The rally in oil prices is mostly a function of the rollover of the contract as we are uncertain what will happen when the next contract matures regarding storage and possible credit issues,” Sebastien Galy, a Luxembourg-based senior macro strategist at Nordea Asset Management, told FOX Business.
Thursday’s advance is a continuation of the gains seen Wednesday after President Trump heightened tensions in the Middle East by ordering the Navy to destroy Iranian gunboats that harass U.S. ships. The Pentagon later tamped down his comments, suggesting ships have the right to self-defense.
The oil market has come under siege this year as ballooning supplies exacerbated by the price war between Russia and Saudi Arabia hit the market at the same time that government responses to COVID-19 destroyed demand.
On Wednesday, the U.S. Energy Information Administration said crude oil stockpiles rose by 15 million barrels in the week ended April 17. At 518.6 million barrels, U.S. inventories are 9 percent higher than their average for this time of year.
The inventory build has no end in sight and producers are running out of storage. The huge runup in supply has been the catalyst in oil falling 81 percent this year through Tuesday. Earlier this week, prices plunged into negative territory for the first time.
The wild swings come as the besieged market looks ahead to May 1, when the production cuts agreed to by the world’s largest oil producers takes hold. The agreement will see OPEC and its allies reduce output by 9.7 million barrels per day and other large producers such as the U.S. and Canada deliver cuts mostly as a result of lower prices. In total, the deal will remove 20 million barrels a day.
With demand down about 30 million barrels a day globally, however, there are concerns the agreement doesn’t go far enough. OPEC is reportedly considering another meeting in May to address those issues.
“In the short-term, the market will be focused on any sign that Saudi Arabia and Russia are moving towards another agreement as President Trump had clearly pointed out that the last agreement was insufficient,” Galy said. “Oil prices as defined by the WTI are likely therefore to converge towards $20, around $5 below the long-term path priced into futures.”