Oil Prices Fall Amid Demand Destruction Fears

Oil & Gas

(Bloomberg) — Oil futures fell to multi-month lows as record growth in coronavirus cases in the U.S. and Europe raised the specter of more demand destruction from tighter lockdown measures.

Futures in New York fell to their lowest since June, while the global Brent benchmark slid to a five-month low. The Covid-19 surge in the U.S. Midwest rose to a record, and the seven-day average in the Northeast reached the most since May. Elsewhere, Italy reached another daily record in virus cases, potentially facing new restrictions on movement.

Still, prices settled above session lows that took U.S. benchmark crude futures below $35 a barrel. A record, yet temporary, surge in U.S. economic growth in the third quarter helped ease some of the demand concerns, while European Central Bank President Christine Lagarde signaled a new package of monetary stimulus in December.

“The GDP numbers suggest that there is an end to this situation, that all the news is not going to be negative and at least to some degree we’re seeing economic recovery,” said Michael Lynch, president of Strategic Energy & Economic Research. On the other hand, “all the Covid news seems to be that we’re shutting down, we’re increasing restrictions on behavior.”

The demand outlook is still bleak with the European Union’s two biggest economies set to impose month-long movement restrictions as nations across the continent post record coronavirus cases. A sorely needed boost to consumption in the form of U.S. stimulus will likely have to wait until after Nov. 3, with both sides at a standstill a week out from the election.

“The reasons for ebb and flow of risk appetite remain Covid-related, with the announcement of a return to stricter lock down measures in Europe, notably France and Germany,” said Harry Tchilinguirian, oil strategist at BNP Paribas SA. “Add to that the all-but-vanished prospect of a fourth round of U.S. fiscal stimulus prior to the presidential election and you have a recipe for macro pessimism that is reverberating across various assets today.”

Prices

  • West Texas Intermediate for December delivery fell $1.22 to settle at $36.17 a barrel
  • Brent for December settlement lost $1.47 to end the session at $37.65 a barrel

The forward market structure is also flashing warning signs, with the WTI strip for 2021 closing at its weakest level since May.

“The market seems to be losing confidence in longer-term demand and is intent on creating an increased disincentive for investment in future capacity,” Standard Chartered analysts Paul Horsnell and Emily Ashford wrote in a report.

Meanwhile, U.S. Gulf operators are still dealing with the effects of Zeta, with Royal Dutch Shell Plc shutting crude and natural gas production overnight in the Mars Corridor due to downstream impacts from the storm.

Other oil-market news

  • Exxon Mobil Corp. will slash its global workforce by 15% by the end of 2022, an unprecedented culling by North America’s biggest oil explorer as it struggles to preserve dividends.
  • Royal Dutch Shell Plc tried to lift itself out of the deepest share-slump in a quarter-century, promising more cash for shareholders even as its business is buffeted by climate change and the coronavirus pandemic.
  • For fragile oil markets, the outcome of next week’s U.S. election poses yet another risk: the prospect that major producer Iran may regain its role in international trade.

–With assistance from Alex Longley.

© 2020 Bloomberg L.P.

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