By David Hodari and Amrith Ramkumar 

A fresh wave of selling drove oil prices to their lowest level since early June on Thursday, sparked by wagers that fresh lockdowns in Europe will dent commerce and travel, eroding demand for fuel.

U.S. crude futures dropped as much as 6.6%, before ending the day down 3.3% at $36.17 a barrel, their lowest close since June 1. Prices started the year above $60, then tumbled briefly below $0 a barrel for the first time ever in late April, when previous lockdowns fueled a glut that threatened to overwhelm storage.

After the summer recovery, they have stayed around $40 for months, but a fall surge in global coronavirus cases is driving a new selloff.

France and Germany announced fresh lockdown measures to combat the pandemic on Wednesday, sparking anxiety among traders that other countries or U.S. states might soon follow, sapping demand for gasoline.

Investors also worry that because Europe will likely consume less oil, traders could look to send any extra barrels to already well-supplied markets in the U.S.

Oil prices are driven by real-time supply and demand dynamics, so many analysts are bracing for more volatility even though hopes for economic stimulus and a coronavirus vaccine have supported other investments such as stocks for much of the year.

"Oil has been propped up for so long by hope. It's consumer driven and many consumers in Europe are being locked up," said Edward Marshall, a commodities trader at Global Risk Management. "You can prop up equities with free cash but you can't do that with oil."

Brent crude, the global gauge of oil prices, fell 3.8% to $37.65 a barrel on Thursday.

Many analysts have cautioned for weeks that prices could decline, but the speed of the selloff has caught some traders off guard, exacerbating the market's swings.

"It has come dramatically fast," said Donald Morton, a senior vice president at Herbert J. Sims Co. who oversees an energy trading desk in Haverhill, Mass. "The buyers are backing off."

A new drop in oil prices would mark the latest blow to the global energy industry and would threaten projections for a 2021 rebound. For much of the year, prices have been too low for many producers to cover their costs.

Layoffs, bankruptcies and a wave of mergers and acquisitions have all swept through the oil patch in recent months. From the start of the year through September, 40 North American energy producers filed for bankruptcy protection, according to law firm Haynes and Boone LLP.

Shares of S&P 500 energy producers rose on Thursday but are still down more than 50% for the year. Analysts are also preparing to gauge Friday's third-quarter earnings reports from Exxon Mobil Corp. and Chevron Corp., with the world's biggest energy companies so far this year posting some of their worst results in years. Exxon said Thursday that it would lay off 1,900 employees in the U.S., becoming the latest major oil company to reduce its workforce.

A return to lockdowns in some of Europe's largest economies may feel familiar to investors who watched coronavirus restrictions collide with a supply war between Saudi Arabia and Russia that flooded the market and crashed prices. But the absence of that price war and more nuanced measures this time around mean a similar drop is unlikely, analysts said.

Even so, restricted economic activity across Europe means that traders are having to reassess their oil-price forecasts for the months ahead.

UBS Global Wealth Management slashed $5 a barrel off its oil-price forecasts on Thursday, citing lower European demand and rising Libyan supply.

Libya recently negotiated an end to an eight-month blockade of its supply. And data from the Energy Information Administration showed surprise inventory increases in the U.S. last week, signaling the market remains heavily supplied as gasoline consumption stagnates. Analysts now worry that the new lockdowns in Europe could start a global trend.

"Today's drop is related to fundamentals because we might easily see another 10% drop in oil demand in Europe in November," said Bjørnar Tonhaugen, head of oil market research at consulting firm Rystad Energy.

Analysts will be looking to the Organization of the Petroleum Exporting Countries and its allies for action. The cartel is expected to meet at the end of November and in January, and it plans to further relax the production cuts agreed in the wake of the oil-market crash earlier this year.

"The latest price slide is likely to spur OPEC into action once again," analysts at Commerzbank said in a note. "We believe it is increasingly unlikely that oil production will be stepped up from January."

Write to David Hodari at David.Hodari@dowjones.com and Amrith Ramkumar at amrith.ramkumar@wsj.com

(END) Dow Jones Newswires

October 29, 2020 15:23 ET (19:23 GMT)

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