Oil Prices Fall Amid More Lockdowns

(Bloomberg) -- Oil tumbled to the lowest since early February as a string of renewed lockdown measures in Europe clouded the prospects for a speedy recovery in consumption.

U.S. benchmark futures plunged 6.2% on Tuesday, and the oil futures curve collapsed into a structure indicating near-term weakness. Europe’s demand recovery is set to take another hit with Germany, France and Italy all having widened lockdown measures this month. Meanwhile, coronavirus cases are surging in India and threatening the economy’s recovery from recession.

West Texas Intermediate and Brent settled below their respective 50-day moving averages, which may add further selling pressure on prices. The nearest Brent futures contract traded at a discount to the next month for the first time since January -- a pattern known as contango that points to oversupply. WTI’s so-called prompt spread was also in contango.

“The swing lower was triggered by the deteriorating near-term demand outlook in the face of still hampered refineries, surging interest and renewed European lockdowns,” Bart Melek, head of commodity strategy at TD Securities, said in a note. “With prices breaking below the 50-day moving average during the session, technical traders may well take WTI lower still.”

Oil has been touted as a popular hedge for inflation, with restrained producer output helping drive global inventory drawdowns as countries worldwide try to emerge from the pandemic. But Tuesday’s selloff provides the latest abrupt setback to an otherwise remarkable price recovery in the wake of signs of weakness in physical markets and hiccups in economic reopening plans.

“Things looked great for a couple weeks and a bunch of funds jumped in, but they possibly decided it was premature,” said Michael Lynch, president of Strategic Energy & Economic Research. Amid “what looks like some bearish demand based on the pandemic in Europe, everybody decided to selloff.”

Prices

• West Texas Intermediate for May delivery fell $3.80 to settle at $57.76 a barrel in New York, the lowest close since Feb. 5 for the prompt month contract
• Brent for the same month lost $3.83 to $60.79 a barrel, the lowest since Feb. 8

In other markets, the dollar climbed, making commodities priced in the currency more expensive, and an advance in U.S. Treasuries showed haven buying, adding to the risk-off mood.

What Bloomberg Intelligence Says:

“U.S. production costs signal that WTI is as vulnerable as it was near the 2018 peak. Even if optimistic outlooks for a quick return to pre-pandemic consumption play out, U.S. producers have plenty of incentive to keep supplying more crude than demand can absorb.”
-- Mike McGlone, BI commodities strategist

The weakness in the nearest part of the futures curve comes as stockpiles built up last year are being unwound from storage, according to consultant Energy Aspects. The contango structure is unlikely to last because the removal of oil from inventories is part of the market’s ongoing re-balancing, the consultant said.

“The road to oil demand recovery appears to be full of obstacles,” said Bjornar Tonhaugen, head of oil markets at consultant Rystad Energy. “The depth of the correction is surprising in a way, as we are just about a week ahead of the upcoming OPEC+ ministerial meeting on April 1 and as the U.S. fiscal stimulus is supposed to boost market confidence.”

In the U.S., crude inventories are expected to have risen last week for the fifth straight week, according to a Bloomberg survey. The industry-funded American Petroleum Institute will report its storage figures later Tuesday ahead of U.S. government weekly data.

Other oil-market news:

• Libya’s state oil producer is set to get the biggest portion of development spending in the country’s new budget, potentially aiding plans to raise output as the industry recovers from a decade of civil war.
• Saudi-led coalition warplanes struck military positions belonging to Iran-backed rebels in Yemen’s capital, hours after the kingdom proposed a negotiated end to a war that’s raged for six years and created the world’s worst humanitarian crisis.
• A former Glencore Plc trader was charged by U.S. authorities with conspiracy to manipulate a key oil price benchmark, the latest sign that prosecutors around the world are stepping up their scrutiny of the notoriously opaque commodity trading industry.
• West Africa’s rate of unsold crude has dropped in the last few days with about 35 cargoes due for loading by the end of next month yet to find buyers, according to traders familiar with the matter.

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