Oil Futures Sink as 2nd Coronavirus Wave Stokes Demand Fears

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Weighed down by sharp losses in equity markets, oil futures on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange plummeted on Monday, sending the U.S. crude benchmark below $39 barrel (bbl) as traders gauge implications for global oil demand in the fourth quarter amid a record surge in new coronavirus infections across the United States and the European Union.

With quarantine restrictions tightening across several major economies, a flagging recovery in oil demand from the March-April shock is likely to take even longer and continue at lower levels until the arrival of a vaccine, according to Mohammed Barkindo, the secretary general of the Organization of the Petroleum Exporting Countries. When asked about the cartel's strategy on restraining supplies next year, Barkindo said producers will stay on course to support the market even as economic growth and demand recovery remains largely anemic due to the virus. The comments, however, raised hope that a scheduled production increase of 2 million barrels per day (bpd) will be pushed back from January to April next year. OPEC+ currently withholds 7.7 million bpd from the global market and was scheduled to relax those cuts to 5.7 million bpd beginning Jan. 1.

Financial markets plunged Monday after the United States, the world's largest economy, reported more than 83,000 new COVID-19 infections over the weekend, surpassing a previous record of roughly 77,300 cases in July when Sun Belt states saw a sharp spike that was largely controlled within a month. Health officials, however, warn the new surge is different and unlikely to be easily controlled as it coincides with a flu season and cooler weather. The sentiment was echoed in comments from White House Chief of Staff Mark Meadows who said Sunday the United States will not get control of the pandemic amid the surge in new cases.

In some parts of the European Union, the relentless rise of COVID-19 infections has already triggered what technically looks like the lockdowns from eight months ago, including nightly curfews and reclosure of nonessential businesses. On Sunday, Spain and Italy declared a national state of emergency, while the Czech Republic closed its national borders and asked citizens to refrain from all nonessential travel. Traffic activity across the 19-nation economic bloc eroded further this weekend, with volumes falling below the Jan. 13 baseline in Italy, Spain and the United Kingdom.

The effect of these restrictions was already evident in Eurozone's economic data for early October, with consumer confidence across the 19-nation economic bloc souring to a negative 15.5 and services sectors falling deeper in contraction with a 46.2 reading.

Domestically, offshore oil producers in the Gulf of Mexico once again began withdrawing staff and shutting down production platforms ahead of Tropical Storm Zeta that is now forecasted to reach the Louisiana Coast as a Category 1 hurricane Wednesday night, early Thursday. Bureau of Safety and Environmental Enforcement estimates that approximately 15.87% of the current oil production in the Gulf of Mexico has been shut-in as of Monday afternoon.

On the session, December West Texas Intermediate futures dropped $1.29 or more than 3% to settle at $38.56 bbl and December Brent crude on ICE declined $1.31 to $40.46 bbl with next-month delivery January contract at a 35-cent premium. NYMEX ULSD November futures slumped 2.95 cents to settle at a 3-week low $1.1218 gallon, with December futures holding a 0.61-cent premium to the expiring contract. The November RBOB contract declined 2.73 cents to $1.1116 gallon and second month delivery futures settled the session with a 1.47 cents discount. The December Brent crude, November ULSD and RBOB contracts expire Friday afternoon.

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

Liubov Georges