Oil edges higher after hitting 18-year lows but demand outlook weighs

Oil edged higher on Thursday after sharp losses in the previous session, with investors hoping 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.

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 per cent.

Brent crude was up 25 cents, or 0.9 per cent, at $27.94 a barrel by 0643 GMT. US West Texas Intermediate (WTI) was up 14 cents, or 0.7 per cent, at $20.01.

Concerns about crumbling demand kept a lid on gains, with both contracts trading earlier in the session as much as 2.5 per cent higher than on Wednesday.

Energy Information Administration data also showed large US refined fuels stock builds despite refiners operating at 69 per cent of capacity nationwide, the lowest since September 2008.

“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.

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 from a year earlier, to the lowest in 25 years, and to just below 30 per cent of pre-coronavirus global demand levels.

The projected demand loss is far more than the output cuts agreed to by producing nations. The Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia, a grouping known as 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 US, could lower production by 20 million bpd.

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

“Given the scale of demand destruction this quarter, OPEC+ cuts will fall short of bringing the market to balance anytime soon, and this is reflected in the price weakness seen since the OPEC+ deal,” said ING bank in a note on Thursday.

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.

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