Oil rises on U.S. stimulus plan, as global price war continues

By Ann Koh on 3/25/2020

SINGAPORE (Bloomberg) --Oil rode a rally driven by optimism over U.S. stimulus spending into a third day, but a vicious price war that shows no signs of abating continued to hang over the market.

Futures in New York extended their gain this week to more than 10% after the White House struck a deal with Senate Democrats and Republicans on $2 trillion in spending and tax breaks. The progress on the rescue package, which came after sweeping measures by the Federal Reserve, pushed the dollar down for a second day, an additional tailwind for oil that’s priced in the U.S. currency.

The specter of collapsing demand and a rapidly expanding glut of oil make a sustained recovery in prices unlikely, however. Reflecting those worries, global benchmark Brent crude’s six-month timespread sank into the deepest contango in more than a decade, a bearish signal indicating over-supply.

As large parts of the global economy shut down to stop the spread of the coronavirus, neither Saudi Arabia nor Russia show any sign of backing down on threats to pump more oil to gain market share. Major trading house Gunvor Group Ltd. estimated the worldwide crude surplus stood at 14 million to 15 million barrels a day, while two of the world’s biggest oilfield services providers warned of a rapid rollback of U.S. shale.

“Arguably, oil is all priced in at $20-odd dollars a barrel,” said Michael McCarthy, chief market strategist at CMC Markets Asia Pacific. However, “it’s a little too soon to say we’ve hit a bottom” as there’s still a chance the U.S. stimulus doesn’t happen, he said.

West Texas Intermediate for May delivery rose 3.3% to $24.80 a barrel on the New York Mercantile Exchange as of 7:34 a.m. in London after closing up 2.8% on Tuesday.

Brent for May settlement climbed 2.3% to $27.77 a barrel on the ICE Futures Europe exchange after finishing up 0.4% on Tuesday. The global benchmark crude traded at a $2.97 premium to WTI.

Meanwhile, North American producers pulled back production in the face of evaporating demand. Chevron Corp. said it would halve spending in the Permian Basin, translating to an output reduction of 125,000 barrels of oil equivalent per day from a previous forecast. Suncor Energy Inc., one of Canada’s biggest oil-sands operators, said it would close one of two so-called trains at its 194,000 barrels-a-day Fort Hills mine.

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