On Tuesday oil prices saw a 6% rebound, but analysts are pessimistic of a major recovery from the biggest daily plunge in nearly 30 years after top producers Saudi Arabia and Russia launched a price war.
Hopes for a settlement and potential U.S. output cuts, had contributed to this rebound in oil prices but gains could be short-lived as oil demand continues to be hit by the economic impact of the coronavirus outbreak.
Brent crude futures rose $2.36, or 6.9%, to $36.72 a barrel by 0307 GMT, while U.S. West Texas Intermediate (WTI) crude gained $1.87, or 6%, to $33.00 a barrel.
Both benchmarks plunged 25% on Monday, dropping to their lowest since February 2016 and recording their biggest one-day percentage declines since Jan. 17, 1991, when oil prices fell at the outset of the U.S. Gulf War.
Trading volumes in the front-month for both contracts hit record highs in the previous session after a three-year pact between Saudi Arabia and Russia and other major oil producers to limit supply fell apart on Friday.
“Oil prices are tentatively finding support as global bond yields have finally started to stabilize. A short-term bottom may be in place for now, but low oil prices are here to stay,” said Edward Moya, senior market analyst at broker OANDA.
“Oil’s rally right now will likely be short-lived as the drivers for both the supply and demand side will remain bearish for now.”
Saudi Arabia plans to boost its crude output above 10 million barrels per day (bpd) in April from 9.7 million bpd in recent months, two sources told Reuters on Sunday. The kingdom slashed its export prices at the weekend to encourage refiners to buy more.
Russia, one of the world’s top producers alongside Saudi Arabia and the United States, also said it could lift output and that it could cope with low oil prices for six to 10 years.
U.S. shale producers rushed to deepen spending cuts and could reduce production after OPEC’s decision to pump full bore into a global market hit by shrinking demand due to the coronavirus outbreak.
“When you look at the leverage the industry is in, at prices of around $30, it’s not profitable,” said Jonathan Barratt, chief investment officer Probis Group.
“Saudis and other Middle Eastern producers have their budgetary constraints, Russia is starved for cash and the breakeven for shale has to be around $50 a barrel. So the dynamics of all those put together will mean they will come to an agreement somewhere.”
The International Energy Agency said oil demand was set to contract in 2020 for the first time since 2009. The agency cut its annual forecast and said that demand would contract by 90,000 bpd in 2020 from 2019.
On Monday, energy stock prices also fell sharply, and shale producers began cutting spending in anticipation of lower revenues.