Brent crude prices rose to nearly $40 per barrel on Wednesday as traders expected defaults to trigger a drop in production, but analysts warned it would take time for the global glut to shrink as energy demand slows.
Brent crude oil futures LCOc1 rose to a high of $39.97 per barrel around 0700 GMT before dipping back to $39.92 by 0731 GMT, still up 27 cents from their last close and over 40 percent higher than the 2016 lows hit in January.
U.S. crude futures CLc1 were at $36.70 per barrel, up 20 cents from their last settlement and also over 40 percent above February’s 2016 low.
Traders said that an expected dip in global production due to defaults had driven the gains.
“Of the 18 defaults since the start of the year, half have been in commodity sectors,” credit rating agency Moody’s said in a report, adding that five of the defaults were in the oil and gas sector while four were in metals and mining.
Analysts at Bernstein said that poor economics could lead to more oilfield closures.
“With only two months into 2016 we find cumulative shut-in production has already reached 60,000 bpd (barrels per day) and up to 260 million barrels of reserves,” Bernstein said, adding these fields were in Norway, Colombia, Brazil, China and Timor Leste.
Analysts said that falling U.S. output, expected to dip from over 9 million bpd currently to 8.19 million bpd in 2017, was also lending support to the market although they added that concerns over slowing demand and an ongoing global production and storage overhang was capping any potential for bigger price gains.
Fresh U.S. output data is scheduled to be published later on Wednesday.
Energy consultancy Wood Mackenzie said that it expected “the annual average price for 2016 to be lower than 2015 and then recover in 2017, reflecting large oversupply and high stock levels during the first half of 2016.”
Further preventing a fundamental shift towards higher prices is a concern over faltering demand in China, where the economy is growing at its slowest pace in a generation. China’s February trade performance was far worse than economists had expected, with exports tumbling the most in over six years.
Although China imported record crude volumes of 8 million barrels per day (bpd) in February, analysts expect this figure to fall as Beijing scales back purchases for its strategic reserves, and car sales begin to fall amid the economic slowdown.
Additionally, chances of a coordinated freeze in production to halt a ballooning global supply glut of over 1 million bpd above consumption are ebbing as OPEC-member Kuwait said it would only cap output if all major producers participate, including Iran, which has balked at the plan.