West Texas Intermediate for January delivery fell 3.2%, while the contract expiring in December fell 3.7%. European Brent slipped 2.9%. The wave of infections in Europe is increasing, raising fears once again of mobility restrictions that would weigh on oil demand. Austria imposed a lockdown while Germany introduced some restrictions.
The concerns come as the oil market focuses on the prospect of releases of strategic crude reserves by the United States and China. The latter said on Thursday it was working on one, while the United States has repeatedly said the option of tapping its strategic oil reserves remains on the table.
“This is a powerful double blow to the oil complex, when there is an impending supply explosion combined with a demand blow from the virus,” said John Kilduff, founding partner of Again Capital LLC.
After hitting its highest level in seven years, oil has weakened over the past month even as the Organization of the Petroleum Exporting Countries and its allies stuck with a cautious approach to restore production. Alarmed by the surge in gasoline prices, US President Joe Biden tried unsuccessfully to get the OPEC + group to deliver more crude, then turned to a possible release of the US strategic oil reserve. The potential weakness of the Chinese economy also contributed to the downside factors.
Despite renewed demand fears, Friday’s sale may have been exaggerated, according to Goldman analysts including Damien Courvalin and Callum Bruce. High-frequency inventory data shows an imbalance between supply and demand of around 2 million barrels per day over the past four weeks, with OECD and Atlantic Basin crude at its lowest in seven years.
“This size of the deficit is in fact enough on its own to absorb the headwinds currently perceived on the bullish thesis of oil, with lower prices actually reducing the chances of a strategic release,” they said in a note.
Meanwhile, the so-called rapid spread of WTI has continued to shrink as supplies increase at the Cushing, Oklahoma hub. The January contract came in at 71 cents premium over February futures contracts, the lowest premium since mid-October.
The rout also extended to the markets for refined products. Benchmarks for gasoline and heating oil in the United States, a reflection of refining margins, have fallen by more than 5 percent each. The European diesel crack also fell sharply.
- Brent fell US $ 2.35 to settle at US $ 78.89 per barrel in New York
- WTI for January delivery lost US $ 2.47 to US $ 75.94
- December’s contract, which expires Friday, was down US $ 2.91 to US $ 76.10
Some traders are still placing bullish bets in the options markets, despite the price drop this week. Contracts that would benefit a buyer from a rally to US $ 200 traded on Thursday for the second week. Although relatively inexpensive, these bets protect against a possible rise in prices.
- Concerns over China’s crude demand are spilling over into the physical market due to the likelihood of another tax investigation of independent refiners as well as potential discharges of its oil reserves, pushing down cash premiums from China. ‘Russian quality favored by these processors.
- High electricity and gas prices add US $ 6 a barrel to the costs of refining oil, according to Bank of America.
- A fleet of tankers loaded with Russian diesel could help ease high prices on the east coast.