The storm engulfing the oil market calmed Wednesday after prices had fallen to levels not seen since late last century.
Brent crude futures, the global benchmark for oil markets, climbed 2.2% to $19.77 a barrel in volatile trading, after sliding to their lowest since 1999 in Asian trading hours. West Texas Intermediate futures—the U.S. benchmark— slipped 0.3% to $11.53 a barrel, after plummeting 43% Tuesday to close at its lowest price in 21 years.
“This rebound today is maybe technically driven, but I see it more as a dead cat bounce,” said Carsten Fritsch, an analyst at Commerzbank. “I can’t see any lasting recovery.”
That came two days after one WTI contract turned negative for the first time in history, with sellers paying buyers to take away their barrels.
This week’s crushing fall in the value of oil has reverberated across energy markets, hitting the value of oil companies and the debt they issue. If oil prices stay at such a low level, the loss of revenue is likely to create widespread financial and political pain for countries reliant on petroleum production.
Government measures keeping billions of citizens at home in an attempt to stymie the spread of the coronavirus pandemic have decimated oil demand. Compounding the problem was a massive overproduction of crude during a price war last month between Saudi Arabia and Russia.
The war has called a truce, but now the world is essentially swimming in oil that nobody needs. Oil producers have been reluctant to shut down because doing so quickly could cause long-term damage to their wells.
Storage capacity has appeared to reach its limit, prompting this week’s massive selloff.
“We could see unexpected methods of storage coming into play if they can’t store it in the traditional pipeline system,” said Richard Fullarton, founder of London-based private fund manager Matilda Capital Management Ltd. “They may have to store it in on-land pond facilities or cap a whole tranche of wells.”
Industry data underscored the massive oversupply. American Petroleum Institute data from late Tuesday showed a 13.2-million-barrel increase in U.S. oil inventories in the most recent reporting week.
If U.S. Energy Department data due Wednesday are similar to the API’s, it will be the fourth straight week that U.S. inventories have risen by more than 10 million barrels.
Free commercial oil storage capacity has dwindled to around 130 million barrels out of an estimated 1.38 billion barrels of space, according to cargo-tracker Kpler, although logistical bottlenecks mean not all that capacity can be used.
The shock to oil prices has reverberated through broader markets, sending stocks of oil producers down. Debt issued by energy companies has also sold off sharply, indicating the rising risk of a wave of defaults, something that could infect other high-yield borrowers, said Seema Shah, chief strategist at Principal Global Investors. U.S. oil companies are among some of the largest issuers, making up about 12% of high-yield bond indexes.
“With oil prices so low, they are going to be under so much pressure right now that you almost have a contagion effect from energy to high yield,” she said.
Some oil company shares stabilized Wednesday. Royal Dutch Shell and BP were both flat.
“There’s a very significant contrast between low oil prices and high equity prices, and I think this has been a reminder that we’re not in the clear yet,” Ms. Shah said. “At least in the short term oil prices are going to be under pressure,” she said.
The drop in prices will most hurt countries that depend on oil for much of their revenue, according to Chris Turner, head of foreign exchange strategy at ING Bank. Countries including Iraq and Bahrain rely on oil for most their revenues, according to an ING analysis.
Write to David Hodari at David.Hodari@dowjones.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
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