Oil recovery picks up on renewed US tension with Iran

US inventory build-up reaches three-year high, taking total to 518.6 million barrels

Fuel storage tanks stand at a PT Pertamina facility in this aerial photograph taken above Tanjung Priok Port in Jakarta, Indonesia on Tuesday, April 21, 2020. Bloomberg

A woman wearing face mask walks past a bank electronic board showing the Hong Kong share index at Hong Kong Stock Exchange Tuesday, April 21, 2020. Asian shares skidded on Tuesday after US oil futures plunged below zero. AP Photo

Oil pumpjacks are seen at the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

Shell station employee J.W. West fills up a customers tank with gasoline in Mobile, Alabama, USA, 20 April 2020. EPA

A man walks past an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

The sun sets behind smoke rising from the LyondellBasell-Houston Refining plant in Houston, Texas, on April 20, 2020. AFP

A staff member cleans an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

An offshore platform near the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A kite surfer rides in front of a line up of ships on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A man sits next to the fearless girl statue next to the New York Stock Exchange on April 20, 2020 at Wall Street in New York City. AFP

The rebound of oil prices continued to gather pace on Thursday, strengthened in part by US President Donald Trump instructing American warships to attack Iranian boats if threatened.

The rebound came in spite of a rise in US inventories and continued concerns over limited storage capacity for crude.

Brent, the international benchmark, was up 8.59 per cent at $22.12 per barrel at 6.17pm UAE time, while West Texas Intermediate, the US benchmark, was up 24.82 per cent at $17.20 per barrel.

US WTI crude futures were back from the brink after slipping into negative territory on Monday, when they closed at minus $37.63 a barrel just before the benchmark's May contract expiry.

Futures traded in single digits before recovering strength the following day.

US President Donald Trump on Wednesday night threatened to engage Iranian vessels that "harassed" US navy vessels in the Strait of Hormuz.

"I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea," Mr Trump said on Twitter.

Iranian vessels were blamed by the US in the first half of 2019 for attacks on tankers crossing the world's most congested route for oil shipments.

A third of the world's seaborne oil uses the strait, which has been a source of geopolitical tension in the past.

Oil prices have rallied to any threats hindering the safe passage of crude through the strait.

Mr Trump's tweet comes amid a build-up in US oil inventory to a three-year high.

Oil stocks rose by 15 million barrels to reach 518.6 million, the US Energy Information Administration said.

Inventories at Cushing, Oklahoma, the delivery point for WTI, were strained as storage neared 78.5 per cent of capacity.

About 4.8 million barrels were added, taking the capacity to 59.7 million. The maximum capacity at the inland oil town is 76 million.

WTI's rebound was mainly fuelled by Mr Trump's tweet, with the brief rally unlikely to hold up prices more sustainably, Swissquote Bank senior analyst Ipek Ozkardeskaya said.

"But with little concern that the world will run out of oil any time soon, sowing chaos in the region may not boost prices sustainably," Ms Ozkardeskaya said.

"Downside risks prevail, with the chatter that oil prices could plunge to minus $100 a barrel."

WTI's tumble into negative territory on Monday, where it fell as low as minus $40 and then persisted in the negative or in single digits the following day, dragged Brent, the international crude benchmark, to more than two-decade lows.

But it is unlikely Brent could collapse as dramatically as US crude futures because it is largely seaborne, with more flexible storage options.

Still, Brent's decline yesterday to $15.93 per barrel in intra-day trading – the lowest since 2002 – proved it is also vulnerable to increased volatility.

"Brent crude is also under pressure, signalling that what should have been contained within the expired WTI May contract had far-reaching spillover effects," Japanese bank MUFG said in a note on Thursday.

The bank expects upsides to Brent and WTI in the second quarter, with the benchmarks expected to average $32 and $28 per barrel.

"This ultra-bear oil market is not yet done but we now expect a sharp rebound in oil prices over the coming weeks," said Ehsan Khoman, head of Mena research and strategy at the bank.

The threat of negative prices is unlikely to go away, Mr Khoman said.

He said it would probably persist "given the physical reality of a still monumentally oversupplied oil market".