Oil bounces back on lower output hopes as coronavirus ravages demand

Oil rose on Thursday, with US crude rebounding from near-20-year lows in the previous session on hopes that a big build-up in US inventories may mean producers have little option but to deepen output cuts as the coronavirus pandemic ravages demand.

Brent crude was up 69 cents, or 2.5%, at $28.38 a barrel by 0102 GMT. US West Texas Intermediate (WTI) was up 56 cents, or 2.8%, at $20.43, Reuters reported.

With official data showing US inventories surging the most on record, WTI fell on Wednesday to its lowest since February 2002, with Brent slumping more than 6%. 
 

The figures followed a report from the International Energy Agency (IEA) that forecast oil demand would fall by 29 million barrels per day (bpd) in April, to the lowest in 25 years, and just below 30% of global demand before the coronavirus outbreak. 

That number is well above production cuts in the pipeline. The Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia, a grouping known OPEC+, have agreed to reduce output by 9.7 million bpd, while hoped-for cuts of another 10 million bpd from other countries including the United States could lower production by 20 million bpd.

"The massive storage build, as counterintuitive as it sounds, did provide some price support as the build foreshadows that more wellhead closures are just around the corner, which effectively trims US supply," said Stephen Innes, chief global markets strategist at AxiCorp.

Last week, the US Energy Information Administration said US production is expected to slump by 470,000 bpd.

Some countries have also committed to increasing purchases of oil for their strategic stockpiles, but there are physical limits to how much oil can be bought.

The "use of strategic petroleum reserves in China, India, South Korea, and the US could add about 200 million barrels of temporary storage, but this only buys a few months of wiggle room," said Innes.

Further cuts to production will be required "to avoid another collapse in oil prices," he said.

Meanwhile, Saudi Aramco has offered oil refineries in Asia and Europe the option to defer payments for crude cargo deliveries by up to 90 days as plants struggle with shrinking demand, four refining industry sources said.

The credit terms, which Saudi Arabia's national oil company has offered through unidentified Saudi banks, are also seen as part of the country's efforts to increase its market share, Reuters reported.

Aramco later said in a statement it "has not made any offers of extended payment terms to crude oil sales."

Aramco "are asking us to amend our existing agreement to include a bill of exchange which will give you basically an opportunity to pay through a bank in 90 days time," one source at an Asian refiner said.

Under the terms, Aramco will receive the payment for the cargoes from the same bank within 21 days of shipment, he said.

The new terms, offered to at least four refiners in Asia and Europe, could alleviate the short-term financial burden for refineries, which have struggled with a collapse in oil demand around the world due to coronavirus-related movement restrictions.

They will however lead to overall higher costs due to more expensive financing terms, according to sources from four refineries.

As a result, at least three refineries have rejected the terms, the sources said.

"It is ... useful for people who are actually looking at rolling or rotating money (but) it comes at a cost. We are actually trying to reduce our overall cost," the first source said.

The Organization of the Petroleum Exporting Countries, along with Russia and other oil producers - a group known as OPEC+ - last week joined with other producing countries, including the United States, for an agreement which is set to remove a total of around 19.5 million barrels per day (bpd) from the market in the face of the demand collapse.

The agreement followed a sharp drop in oil prices to below $20 a barrel after Saudi Arabia and Russia launched a price war to try to increase their market share after ending a four-year production cut deal.

"Following the OPEC+ deal, Saudi's agenda remains broadly intact in as far as maintaining pressure on US and international oil companies while continuing its passive-aggressive price war with other producers," said Christyan Malek, JPMorgan's top European oil and gas analyst.