Oil rises on Middle East tensions with the US and supply cuts

London — Oil rose on Thursday, spurred by rising tensions in the Middle East, output cuts by producing nations to tackle oversupply, and the promise of more government stimulus to ease the economic pain of the coronavirus pandemic.

Brent crude was up $1.78, or 8.7%, at $22.15 a barrel by 9.40am GMT. US crude rose $1.87, or 13.6%, at $15.65 a barrel.

Oil prices have suffered one of their most tumultuous weeks ever. On Monday, the expiring front-month US contract fell into negative territory for the first time as traders paid buyers to take crude off their hands given a lack of storage space for the current supply glut.

So far this year, Brent has lost roughly two thirds of its value.

Concerns about the collapse in demand because of travel restrictions to contain the coronavirus and a shortage of space to store oil still dominate, but analysts say they do not expect a repeat of Monday’s price shock.

The rally on Thursday followed an announcement from US President Donald Trump that he had instructed the US Navy to fire on any Iranian ships that harass it in the Gulf, though he added later he was not changing the military’s rules of engagement.

“This ratchets up tensions once again between the US and Iran. However, given the glut we have in the oil market, it is difficult to see this offering lasting support to the market, unless the situation does escalate further,” ING’s head of commodities strategy Warren Patterson said.

Output cuts by producers also supported prices. Kuwait began reducing oil supply to the international market without waiting for the deal agreed by major oil exporting countries to take effect on May 1.

Oil cartel Opec, Russia and other oil producing nations (Opec+), agreed this month to cut output by a record amount, representing about 10% of global supply, to support oil prices.

“It is questionable that bringing forward the planned output restraint by a week would make a material difference, especially as no-demand consolidation is anticipated in the current quarter,” PVM Oil Associates analyst Tamas Varga said.

In addition to the Opec+ deal, other producers are pledging reductions. Oklahoma’s energy regulator said companies could shut wells without losing their leases. The state is the fourth-largest oil producer in the US.

Data on Wednesday showed US crude inventories rose by 15-million barrels in the week to April 17 to 518.6-million barrels, putting them within striking distance of a record of 535-million barrels set in 2017.

The stocks build was less than the market had expected, analysts said, providing some support for prices, while the promise of more government stimulus improved market sentiment across global markets.

The US House of Representatives expects to pass a nearly $500bn Covid-19 relief bill on Thursday to provide funds to small businesses and hospitals struggling with the economic toll of the pandemic.

Reuters