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
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
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
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
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
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
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
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
Write to David Hodari at David.Hodari@dowjones.com and Amrith
Ramkumar at email@example.com
(END) Dow Jones Newswires
October 29, 2020 15:23 ET (19:23 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.