Oil prices extended their rally Tuesday as economies hard hit by the coronavirus slowly reopen for business.
Futures that will deliver U.S. crude in June gained 8.7% to $22.15 a barrel, putting them on course to rise for a fifth consecutive day. The price of the June contract has almost doubled since April 21, when worries that North America’s main hub for storing oil would run out of space.
Brent crude, the benchmark for international energy markets, rose 6.8% to a three-week high of $29.04 a barrel.
Oil prices are receiving a boost on two fronts. Demand for products such as gasoline and diesel is ticking up as parts of the U.S. and Europe relax restrictions on movement and the Chinese economy recovers. At the same time, the production of crude oil has dropped.
Investors are likely to remain cautious despite the recent rally.
Photo: mazen mahdi/Agence France-Presse/Getty ImagesAn agreement to limit output among members of the Organization of the Petroleum Exporting Countries and Group of 20 nations, including Russia, kicked in on May 1. Low prices have prompted producers in the U.S., Norway and elsewhere to pump less oil.
“You have low crude production in North America in reaction to the very low prices,” said Olivier Jakob, managing director at consulting firm PetroMatrix. Department of Energy data show “some improving implied demand in the U.S. as they soften shelter-in-place policies,” he added.
Global oil demand has risen by 2.5 million barrels a day from its trough in early April, according to analysts at Goldman Sachs Group. Production is falling faster.
OPEC and its allies agreed to cut output by 9.7 million barrels a day, or 13% of global supply. Producers elsewhere have stopped pumping an additional 3.4 million barrels a day, said Martijn Rats, a commodities strategist at Morgan Stanley.
There are other signs that the oil market has turned a corner. The gap between spot prices for West Texas Intermediate, or what it costs to buy a barrel of oil today, compared to the price of futures contracts, which are based on prices down the road, has narrowed after a dramatic widening in April. That has reduced the financial incentive for traders to put U.S. crude into storage.
Investors are likely to remain cautious, analysts say. Driving activity remains subdued in India, Japan and Saudi Arabia, according to Mr. Rats, even as cars return to the roads in the U.S., Brazil and Russia.
Oil storage capacity remains an overhang on the market.
“The problem of storing WTI hasn’t gone away and it will get worse over the next few weeks,” said Caroline Bain, commodities economist at Capital Economics. “I don’t think we’re out of the woods yet.”
—Joe Wallace contributed to this article.
Write to David Hodari at David.Hodari@dowjones.com
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