Oil Prices Slump on US Fuel Supply Build

(Bloomberg) -- Oil and gasoline futures tumbled the most in more than two weeks after a U.S. government report showed swelling fuel stockpiles and slowing demand as the coronavirus pandemic rages.

Both crude and gasoline futures in New York declined 4% on Wednesday. Domestic gasoline inventories rose 1.9 million barrels last week, the biggest increase since May, while a measure of gasoline consumption slid to the lowest since late September, according to an Energy Information Administration report. The mounting fuel supplies and lackluster demand may worsen during the normally sluggish winter driving months.

“The lockdowns, the higher Covid cases and travel restrictions in Western Europe and elsewhere are clearly bearish for petroleum demand,” said Andrew Lebow, senior partner at Commodity Research Group. “That trend doesn’t look like it’s going to get any better in the upcoming weeks. If anything, it’s probably going to get worse.”

Rising coronavirus infections worldwide are putting a damper on an already murky demand outlook, with governments imposing or considering tighter restrictions. Milan, Italy’s financial capital, will be under night-time curfew beginning this week, while Germany’s new infections reached a record. In the U.S., New York posted more than 2,000 new Covid-19 cases for the first time since May.

JBC Energy cut its outlook for oil-products demand this year and early 2021, saying that “the persistent lack of recovery in U.S. gasoline demand remains particularly worrisome.”

Flagging fuel demand highlights the importance of ongoing discussions over the next round of U.S. virus aid to reviving energy consumption. House Speaker Nancy Pelosi said she “has a prospect for an agreement” with Treasury Secretary Steven Mnuchin on a coronavirus stimulus package, although it may not come together in time to pass both chambers before the Nov. 3 election.

“There’s concern about the growing virus caseload in a lot of places hitting demand, especially if there’s not some fiscal stimulus,” said Michael Lynch, president of Strategic Energy & Economic Research. “Global inventories are still quite high and they’re not going to come down until we get a stronger demand recovery. Now, it looks like that will be pushed further out into the future.”

Prices

• West Texas Intermediate for December delivery fell $1.67 to settle at $40.03 a barrel
• Brent for December settlement lost $1.43 to end the session at $41.73 a barrel
• Both crude benchmarks dropped to the lowest since Oct. 12
• Gasoline futures fell 4% to settle at $1.1403 a gallon

The surprise gasoline build led to another leg lower for refining margins. The so-called crack spread for combined gasoline and diesel against WTI futures slumped to the lowest since early April, providing little incentive for refiners to churn out more product in the midst of depressed demand.

“There’s no reason for these guys to run the refinery. It’s a losing proposition,” said Bob Yawger, head of the futures division at Mizuho Securities. “There’s nobody that’s in a hurry to bring refinery utilization rates back up.”

In another sign of weakness, the EIA report showed a fifth straight weekly build at the nation’s biggest storage hub in Cushing, Oklahoma. Crude inventories there are now over 60 million barrels for the first time since May. The spread between WTI’s nearest contracts weakened to its widest contango structure in nearly a week, signaling concerns of oversupply.

Still, distillate stockpiles decreased 3.83 million barrels last week and crude stockpiles dropped just over 1 million barrels, the government data showed.

Other oil-market news:

• U.S. refiners used to be able to count on Latin America as a reliable outlet for exports when fuel consumption was in the doldrums at home. That may no longer be the case because of Covid-19.
• After years of setbacks and false starts, Libya is back in the oil game. A stalemate between the armed forces battling to control the OPEC nation has led to an uneasy truce, and most fields and ports shuttered amid the fighting are operating once again.
• The series of mergers reshaping the beleaguered U.S. shale oil industry accelerated Tuesday when Pioneer Natural Resources Co. agreed to buy Parsley Energy Inc. for $4.5 billion in stock, creating one of the largest producers in the Permian Basin.
• Canada’s Suncor Energy Inc. is exploring the sale of a handful of oil and gas fields in the North Sea, according to people with knowledge of the matter.

--With assistance from Grant Smith.

© 2020 Bloomberg L.P.