DTN Oil

Oil Futures Fade as Renewed Lockdowns Spur Q4 Demand Worry

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange nearest delivery oil futures and Brent crude on the Intercontinental Exchange pared early losses but still ended lower Thursday as investors weighed the impact renewed lockdowns in the European Union and elsewhere would have on oil demand as governments there struggle to contain a rising rate of coronavirus infections against pledges by officials from the Organization of the Petroleum Exporting Countries and Russia-led partners to continue efforts to rebalance the market in the upcoming months.

During a technical meeting Thursday, OPEC+ ministers pledged their full support behind the group's ongoing production agreement, collectively reducing output by 7.7 million barrels per day (bpd), hinting that a scheduled phase down to cuts of 5.7 million bpd on Jan. 1, 2021, would be delayed. The prospect of delaying the 2 million bpd hike next year will be considered at their Nov. 30-Dec. 1 meeting.

"Global demand isn't recovering as quickly as expected," said OPEC General Secretary Mohammed Barkindo, adding there's "no reason to worry" when asked about the group's plans to raise production early next year.

Earlier this week, OPEC revised lower their global demand estimates for 2020 to 90.3 million bpd on a 9.5 million bpd annualized drop on weaker than expected demand for transportation fuels in the United States and parts of Europe over the summer. For 2021, OPEC adjusted their demand projection lower by 80,000 bpd to 96.84 million bpd.

Members that were behind on their production quotas, namely Iraq and Nigeria, appear to have fulfilled their pledges to compensate for past overproduction, delivering an additional 344,000 bpd of additional curbs last month. That leaves a cumulative excess of 2.3 million bpd to clear by the end of the year, according to reports.

The Energy Information Administration's inventory report for the week ended Oct. 9 released late morning was overall bullish, detailing across-the-board declines in domestic crude and petroleum products stocks in large part due to disruptions caused by Hurricane Delta, which made landfall near the Texas-Louisiana border.

Distillate inventory plunged 7.2 million barrels (bbl) to a 164.6 million bbl, 4-1/2 month low while gasoline stocks held below the 5-year average for a second straight week following a 1.6 million bbl draw to 225.1 million bbl. Implied demand for gasoline, however, tumbled 320,000 bpd from the previous week to 8.3% below a year ago at 8.576 million bpd.

The weekly drop in demand fanned concern over slowing consumption and followed an unexpected jump in initial U.S. unemployment claims to 898,000 -- 73,000 above market consensus. The increase follows announcements by a slew of companies announcing layoffs earlier this month.

Expectations for sluggish oil demand was discussed Thursday in London by top global traders including Vitol, Trafigura and Gunvor who told attendees at an Energy Intelligence Forum they see a slow recovery due to limited mobility and rising cases of coronavirus infections in parts of Europe and the United States.

In Europe, governments accelerated quarantine measures in major cities, with London, Madrid and Paris already under high-alert warnings. Nearly half of the UK population now live under some sort of curfew or partial lockdown, which is bound to shutter economic activity and demand for fuels.

On the session, November West Texas Intermediate futures settled little changed at $40.96 bbl and the December Brent contract slipped 16 cents to settle just above $43 bbl at $43.16 bbl. NYMEX November ULSD futures declined 0.38 cents to $1.1887 gallon and November RBOB futures fell 1.71 cents to settle at $1.1800 gallon.

WTI futures were also pressured by a stronger U.S. dollar, which strengthened 0.5% in index trade against a basket of foreign currencies to 93.864.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges