Oil plunges below US$39 on surging Covid-19 cases, US stimulus stalemate

Futures in New York fell toward US$39 a barrel on Oct 26.
Futures in New York fell toward US$39 a barrel on Oct 26.PHOTO: NYTIMES

SYDNEY (BLOOMBERG, REUTERS) - Oil extended its slide to a second day on a toxic cocktail of surging coronavirus cases in the US and Europe, dwindling prospects for pre-election stimulus in Washington and a steady resumption of supply from Libya.

Brent crude was down 89 cents, or 2.1 per cent, at $40.88 by 0647 GMT on Monday (Oct 26). US West Texas Intermediate (WTI) dropped 89 cents, or 2.2 per cent, to $38.96, having fallen more than a dollar shortly after the start of trading.

Brent fell 2.7 per cent last week and WTI dropped 2.5 per cent.

The United States reported its highest number yet of new coronavirus infections in two days through Saturday, while in France new cases hit a record of more than 50,000 on Sunday, raising worries about crude demand. Italy approved a partial lockdown and Spain announced a national curfew. Meanwhile, Democrats and Republicans in the US accused each other of “moving the goalposts” in interviews on CNN as hopes for a deal before next week’s election appeared to be in tatters.

On the supply side, Libya’s National Oil Corp on Friday ended its force majeure on exports from two key ports and said production would reach one million barrels per day (bpd) in four weeks, a quicker ramp-up than many analysts had predicted.

“New barrels of Libyan oil come at a time when the crude oil market had just faced the disappointment from the recently concluded OPEC+ ministerial panel when the organisation made no new policy proposals,” said Avtar Sandu, senior manager commodities at Phillip Futures in Singapore.

Opec+, a grouping of producers including the Organization of the Petroleum Exporting Countries (Opec) and Russia, is also set to increase output by two million bpd in January 2021 after cutting production by a record amount earlier this year.

A little more than six months after Covid-19 sent oil prices into a tailspin, a second wave is threatening to take another bite out of energy demand. There are several reasons why a repeat of April’s bloodbath is unlikely, however. Flagging consumption isn’t coinciding with a price war, governments may be less likely to impose major lockdowns and demand in Asia is holding up.

“Demand issues tied to resurgent virus cases have taken the market’s attention for the past few weeks,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group. “The supply side issues have now certainly started to gain a little bit more prominence with Libya suggesting that their supplies will rise significantly over the next couple of months. That presents a new headwind for Opec.”

If virus cases keep rising in Europe and the US, it’s possible the Opec+ alliance will push back a planned easing of production cuts from January.  Russian President Vladimir Putin last week signaled openness to delaying the taper. The group will decide on whether to stick to the current plan at a meeting scheduled for Nov 30-Dec 1.