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Oil falls to five-month low as lockdowns and Libya spook market

Crude oil prices could soar with no new upstream investment
Crude oil prices could soar with no new upstream investment

Oil kicked off what promises to be a turbulent week of trading by plunging to a five-month low as a continued increase in Libyan crude production coincided with a wave of new virus-lockdown measures in Europe.

The double whammy of falling demand and growing supply pushed futures in New York down as much as 6% in Asian trading.

That could be just the curtain raiser for price action as Americans head to the polls on Tuesday in an election set to have far-reaching consequences for battered financial markets.

The pace of Libya’s production recovery continues to surprise traders and create a headache for the OPEC+ alliance.

Daily output has reached 800,000 barrels and the country is targeting 1.3 million by the beginning of 2021, said Mustafa Sanalla, the chairman of state-run National Oil Corp.

That compares with just 100,000 barrels a day in early September.

UK Prime Minister Boris Johnson announced a partial lockdown for England over the weekend, with most countries in western Europe already facing tougher restrictions.

Cases are also jumping in the US, although the pace of new infections slowed Saturday after two straight days of national records.

Global oil demand could fall to as low 88 to 89 million barrels a day as the second wave of the virus hits Europe and the US, Jeremy Weir, chief executive officer of oil trader Trafigura Group, said at a conference in Singapore.

That compares with around 100 million barrels a day last year, according to the International Energy Agency.

The worsening demand outlook coupled with fresh supply has pushed American crude benchmark West Texas Intermediate down around 18% from its close on October 20.

An election win for Democrat Joe Biden, who is ahead in the polls, could boost oil on expectations for more fiscal stimulus.

It’s also possible the results will initially be inconclusive, setting the market up for more volatility.

“It’s a witch’s brew in the oil market, with the US election, England joining the list of European lockdowns, and surging Libyan production,” said Vandana Hari, founder of Vanda Insights in Singapore.

“It’s hard to say how exactly the market is pricing in the election: perhaps we’re seeing higher odds of a Biden win and Iranian oil supply resumption being factored in or perhaps it’s the chances of a contested election and chaos.”

Prices

  • West Texas Intermediate for December delivery fell 4.6% to $34.14 a barrel on the New York Mercantile Exchange at 7:37 a.m. in London. It closed down 1.1% on Friday at the lowest level since June 1 to cap a 10% weekly drop.
  • Brent for January settlement dropped 2.7% to $36.46 on the ICE Futures Europe exchange to the lowest level in five months.

The futures curve reflected the growing concern over a potential supply glut.

Brent’s three-month timespread was $1.49 a barrel in contango, where prompt prices are cheaper than later-dated ones, the widest since late September.

The UK, France, Germany and Belgium have all announced they will be going back into lockdown in recent days, Warren Patterson, head of commodities strategy at ING Bank NV in Singapore, said in a note.

These four countries account for a little over 6% of global oil consumption, and so it’s not a surprise that we are seeing the market reacting, he said.

However, Vitol Group, the world’s biggest independent oil trader, said the latest lockdown measures would be just a “speed bump”, with tightening global inventories likely to cushion the downside.

The bigger picture is still that the world is in a stock-drawing mode, Mike Muller, the head of Asia for Vitol Group, said in an interview Sunday with Dubai-based consultant Gulf Intelligence.

Drilling rigs targeting oil in the US, the world’s largest producer, rose by 10 to 221 in the past week, according to Baker Hughes.

That’s the sixth straight weekly increase, suggesting activity is picking up despite the demand outlook.

”Libyan production returning is going to be an increasingly important factor driving oil prices,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd.

The increasing lockdown measures in Europe have also “definitely shaken market confidence,” he said.

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