By Joe Wallace, David Hodari and Amrith Ramkumar
Crude-oil prices jumped Thursday, extending a string of wild
moves that are ricocheting across financial markets and roiling the
global energy industry.
While prices have clawed back ground over the past two sessions,
oil now trades at a fraction of where it started the year and is
well below levels that make it profitable for companies to produce.
The longer most of the world practices social distancing due to the
coronavirus, the bigger the global glut of crude grows.
Many analysts are skeptical that the large percentage rebound
from the past few days will persist, noting that such big gains
tend to cluster around long-term declines. Traders are bracing for
more gyrations in the coming weeks.
U.S. crude-oil futures for delivery in June rose 20% to $16.50 a
barrel Thursday. The benchmark started the year above $60 and is
still near its lowest level in more than two decades. Brent crude
futures, used to set prices for oil throughout global energy
markets, rose 4.7% to $21.33 a barrel.
Helping prices regain some lost ground: signs of a recovery in
demand for oil in China, which is emerging from coronavirus
lockdowns, and tensions between the U.S. and Iran. The two nations
engaged in a new round of antagonism Wednesday, when Tehran said it
had launched its first military satellite into space.
Earlier in the day, President Trump threatened to destroy
Iranian boats that harass the U.S. Navy, boosting oil prices. Such
barbs can lift crude because traders are very sensitive to tensions
in the region that could disrupt the movement of oil through the
Strait of Hormuz, a vital shipping channel for tankers.
"When you look at China, road traffic and refinery operations
are back up," said Norbert Rücker, head of economics at Swiss
private bank Julius Baer. "Don't forget the geopolitical side,
too."
Thursday's advance continues a period of outsize moves in oil
that is rippling to stock, bond and currency markets. Investors are
concerned that damped spending, bankruptcies and layoffs in the
energy industry could make the economic damage from the coronavirus
pandemic even more severe.
The price of the most actively traded U.S. crude futures
contract has moved up or down about 10%, on average, on each
trading day since the start of March. That compares with an average
move in either direction of 1.5% in 2019 as a whole, according to
FactSet data.
Many analysts are still reeling from Monday's chaos in oil. That
day, a futures contract for delivery next month tumbled below $0 a
barrel, a first in crude-market history. The plunge meant traders
effectively had to pay buyers to take oil off their hands due to a
lack of available storage for crude around the world.
That futures contract expired in positive territory on Tuesday,
but analysts are wary of a repeat with supply overwhelming demand.
Traders say investors unfamiliar with oil markets were likely stuck
holding some of the May futures contracts near expiration, not
realizing that they would either have to sell them or accept
delivery of physical barrels that -- with storage full -- likely
would have nowhere to go.
That allowed counterparties on the other side of the trades to
send futures prices plunging well below $0.
"It was the perfect storm," said Donald Morton, a senior vice
president at Herbert J. Sims & Co. who oversees an energy
trading desk in Haverhill, Mass.
Global inventories also continue to climb, highlighting the
growing glut collapsing the market. U.S. stockpiles rose 15 million
barrels last week, Energy Information Administration data showed
Wednesday, continuing a series of large increases. Many analysts
project inventories to break through record levels in a matter of
weeks and near capacity.
As a result, many investors expect more big oil-price swings
ahead. One gauge of how volatile U.S. crude prices are expected to
be over the next 30 days, the Cboe Crude Oil ETF Volatility Index,
has risen roughly 730% this year to its highest level on
record.
Like the better-known VIX gauge that tracks volatility in the
stock market, the index uses options prices to calculate how far
traders are expecting prices to move over the next month.
The oil-volatility options aren't tied to oil futures prices
directly but instead to United States Oil Fund LP, an
exchange-traded fund that aims to match U.S. crude prices. The fund
recently accumulated a huge position in the futures market, thanks
to a rush of cash from individual investors.
Analysts say some of those individual investors likely weren't
aware how the fund works, adding to the chaos in recent weeks.
Some market watchers now expect the mounting losses and Monday's
historic drop to dissuade investment in the sector.
"We're getting close to the point when people just stop trying
to buy this," said Marwan Younes, chief investment officer at hedge
fund Massar Capital Management.
Write to Joe Wallace at Joe.Wallace@wsj.com, David Hodari at
David.Hodari@dowjones.com and Amrith Ramkumar at
amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
April 23, 2020 15:44 ET (19:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.