Light Crude Down 11% for the Month

(Bloomberg) -- Oil posted its largest monthly drop since March as renewed lockdown measures to contain the coronavirus threatened to upend a shaky demand recovery.

Futures fell 1.1% in New York on Friday to end the week below $36 a barrel taking their cue from a broader market selloff and the worst week for U.S. stocks since March. At the same time, the U.S. posted a record surge in daily coronavirus infections, while new restrictions in Europe could drive the region toward another recession.

“The risk appetite in the market is definitely lower,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “The return-in-demand story is taking a lot longer to play out than oil bulls had hoped.”

A return to tougher lockdown measures will likely deter a substantive rebound in airline demand, with more restrictions in Europe prompting further cuts in airline capacity for the remainder of the year. Still, there’s some support from booming freight markets and improvements in China and India. All the while, traders are looking ahead to next week’s U.S. election and an OPEC+ meeting at the end of November.

The concerns over demand come at a time when the Organization of Petroleum Exporting Countries and its allies face a challenge in their efforts to keep supply in check with the faster-than-expected return in Libyan output. Iraq reaffirmed its support for the OPEC+ oil-production cuts and won’t be seeking any exemption from the curbs next year, Oil Minister Ihsan Abdul-Jabbar said.

Meanwhile, Norway’s largest oil field will pump at pre-Covid levels after receiving the government’s permission last month.

“There’s a really high level of insecurity out there surrounding the election, surrounding the path of economic growth, and this new surge in infections,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “Until you get some evidence that things are starting to improve, it’s going to be tough for crude to do better.”

Prices

• West Texas Intermediate for December delivery fell 38 cents to settle at $35.79 a barrel. The contract fell 11% during the month.
• Brent for December settlement, with its last trade date Friday, lost 19 cents to $37.46 a barrel
• The more active January contract declined 32 cents to end the session at $37.94 a barrel

The futures curve also continued to weaken. WTI’s front-month contract closed at the deepest discount to its second-month since early September. The spread between the benchmark’s nearest December contracts, a closely watched gauge of market strength, also deepened its contango.

Deteriorating refining margins are spurring refiners to shutter plants or take tentative approaches to reopening facilities as fuel demand remains depressed. Phillips 66 said a restart of its Alliance refinery in south Louisiana in early 2021 depends on market conditions, while in Australia, BP Plc said it will cease fuel production at its Kwinana refinery. Exxon Mobil Corp. sees more pain ahead for the space, saying there are more oil refineries than the world needs and the least-sophisticated plants will continue to shut down.

“The oil refining sector is witnessing some rather abrupt changes in light of the global pandemic and its continued and long-term impact to global travel,” Ryan Fitzmaurice, commodities strategist at Rabobank, said in a note. “Crude import demand to the U.S. and Canada’s east coast is likely to be challenged going forward given the reduction in refining capacity there.”

Other oil stories:

• Exxon Mobil Corp. warned it may take up to $30 billion in writedowns on natural gas fields after posting a historic loss despite sweeping budget and job cuts.
• Chevron Corp. posted a surprise profit as the oil supermajor slashed capital spending to cope with the pandemic-driven collapse in crude demand.
• Total SE continued to ride out tough times for the oil industry by posting third-quarter profit that exceeded the highest analyst estimate, paying down debt and maintaining a generous dividend.

--With assistance from Alex Longley.

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