Oil drops 2%, snapping five-day winning streak in volatile trading session

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An aerial view of oil tankers anchored near the ports of Long Beach and Los Angeles amid the coronavirus pandemic on April 28, 2020 off the coast of Long Beach, California.
Mario Tama | Getty Images

Oil prices dropped on Wednesday, snapping a five-session winning streak, as oversupply concerns outweighed optimism over economies reopening.

West Texas Intermediate, the U.S. benchmark, shed 2.3%, or 57 cents, to settle at $23.99 per barrel. In a volatile session, the contract swung between a gain of more than 6% at the high — climbing to $26.08 — and a more than 8% loss, hitting a session low of $22.58 per barrel. On Tuesday the contract soared 20.45%

Brent crude, the international benchmark, settled 4% lower at $29.72 as the coronavirus pandemic continues to hit demand.

"The rally in crude also feels lofty as discussions with refiners continue to suggest lower run cuts are in the cards given weak margins," analysts at Tudor, Pickering, Holt & Co., a Houston-based energy investment bank, said in a note to clients Wednesday.

Data from the U.S. Energy Information Administration released Wednesday showed that for the week ending May 1 inventories rose by 4.6 million barrels, which was smaller than the 8.67 million barrels build analysts had been expecting, according to FactSet.

Over the last week, WTI has soared more than 50% as easing shelter-in-place restrictions fueled optimism that demand for oil may have bottomed. Given the rapid run higher, Jeff Kilburg, CEO at KKM Financial, said the selling could be due to investors locking in gains.  

"Crude oil volatility persists and after a nearly 100% sensational move higher (off of $14 on 4/29) WTI is incurring some profit taking," he told CNBC. "Additionally, the demand for crude remains quite opaque as re-openings of economies globally occur," he added.

NationsShares president and chief investment officer Scott Nations noted that the recent run took the WTI contract for June delivery to its highest level since it became the front-month contract, so "the getting probably seemed good."

An improving demand outlook spurred recent optimism, with prices also supported by producers announcing scale backs in operations. The historic cut from OPEC and its oil-producing allies, which takes 9.7 million barrels per day offline, went into effect on May 1. Norway and Canada have also curbed production.

In the U.S., data from the Energy Information Administration showed that last week production declined by 200,000 bpd to 11.9 million bpd. This is 1.2 million bpd below March's record high. Exxon, Chevron and ConocoPhillips are among the companies that have cut production in the face of depressed prices.

But some note that as storage continues to fill, the announced shut-ins are still not enough.

"Indications show that for yet another week, storage is continuing to fill up, despite the shut-ins and the output cuts," noted Bjornar Tonhaugen, head of oil markets at Rystad Energy. "Demand, which indeed now is on the recovery road, is not yet enough to balance the produced oil and that oil has to go somewhere," he added.