Oil tumbled along with broader markets as swelling U.S. crude stockpiles added to uncertainty over the economic impact of rising coronavirus cases worldwide.
Futures in New York slid as much as 6.2% on Wednesday, the biggest intraday drop in three weeks. An Energy Information Administration report showed domestic oil inventories rose 4.32 million barrels last week, the biggest build since July. Still, the data showed an unexpected decline in gasoline stockpiles and one indicator for product demand hit the highest since March.
Prices traded lower alongside U.S. equities with weakness seen from Boeing Co. to Microsoft Corp. Meanwhile, a renewed surge in virus cases in Europe is spurring governments to consider tougher restrictions. U.K. Prime Minister Boris Johnson may be forced to impose a national lockdown as the country could face a prolonged winter peak in the pandemic. In the U.S., there has been a surge in Covid-19 hospitalizations, especially in the Midwest.
“This is a slight negative for supply, but it’s more about people’s concern on demand and we’re seeing that really across the energy complex today,” said Quinn Kiley, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. “A broad Europe shutdown would be a negative for prices and there’s a risk that they take another leg down.”
Fresh demand risks due to the resurgent pandemic and the return of Libyan oil output are raising concerns that additional supply from OPEC+ may not find a market. The head of Saudi Aramco’s trading unit warned there may not be enough oil demand to absorb the planned OPEC+ supply increase in January and traders are cautious of taking long positions on crude due to the uncertain outlook. In the U.S., the lack of another round of virus aid before the election is also clouding the picture for an economic rebound.
“The ‘risk-off’ tone across global markets is the key driver for oil prices today and the inventory report did little to change that,” said Ryan Fitzmaurice, a commodities strategist at Rabobank. “The continued uptick in virus cases, a lack of fresh stimulus, and political uncertainty amid a tightening U.S. election have all soured the near-term outlook.”
West Texas Intermediate for December delivery dropped $2.23 to $37.34 a barrel at 10:56 a.m. in New York
Brent for December settlement tumbled $2.08 to $39.12 a barrel
The oil market’s structure has weakened markedly in recent days. Brent’s nearest futures contract is at its biggest discount to the next month in about two weeks, as concerns about the market’s health in the near-term grow.
WTI’s prompt spread also weakened on Wednesday. Meanwhile, both Brent and WTI strips for 2021 have softened, with Brent’s set to close at its lowest level since May and WTI’s heading for its weakest close since June.
Meanwhile, companies operating in the Gulf of Mexico are continuing to prepare for Hurricane Zeta, which is threatening to slam into New Orleans later Wednesday as a Category 2 storm. The storm has already spurred U.S. Gulf operators to shut in nearly half of their total oil output in the area.