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Oct 29, 2020

Oil pares losses after plunging to four-month low on virus fears

Oil plunges to lowest level since May

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Oil futures eased off session lows as stronger-than-expected U.S. economic growth data and signs that Europe may get more stimulus offset some of the fallout from renewed lockdown restrictions.

Futures in New York pared losses after dropping below US$35 a barrel to their lowest since June, while the global Brent benchmark also eased losses after sliding to a five-month low. The U.S. economy saw a record yet temporary surge of growth in the third quarter and European Central Bank President Christine Lagarde signaled a new package of monetary stimulus in December.

“The GDP numbers suggest that there is an end to this situation, that all the news is not going to be negative and at least to some degree we’re seeing economic recovery,” said Michael Lynch, president of Strategic Energy & Economic Research. On the other hand, “all the COVID news seems to be that we’re shutting down, we’re increasing restrictions on behavior.”

The demand outlook is still bleak with the European Union’s two biggest economies to impose month-long movement restrictions as nations across the continent post record coronavirus cases. A sorely needed boost to consumption in the form of U.S. stimulus will likely have to wait until after Nov. 3, with both sides at a standstill a week out from the election.

“The reasons for ebb and flow of risk appetite remain COVID-related, with the announcement of a return to stricter lock down measures in Europe, notably France and Germany,” said Harry Tchilinguirian, oil strategist at BNP Paribas SA. “Add to that the all but vanished prospect of a fourth round of U.S. fiscal stimulus prior to the presidential election and you have a recipe for macro pessimism that is reverberating across various assets today.

Prices

  • West Texas Intermediate for December delivery fell US$1.17 to US$36.22 a barrel at 1:35 p.m. in New York
  • Brent for December settlement lost US$1.32 to US$37.0 a barrel

The forward market structure is also flashing warning signs, with the WTI strip for 2021 heading for its weakest close since May.

“The market seems to be losing confidence in longer-term demand and is intent on creating an increased disincentive for investment in future capacity,” Standard Chartered analysts Paul Horsnell and Emily Ashford wrote in a report.

Meanwhile, U.S. Gulf operators are still dealing with the effects of Zeta, with Royal Dutch Shell Plc shutting crude and natural gas production overnight in the Mars Corridor due to downstream impacts from the storm.

Other oil-market news

  • Exxon Mobil Corp. will slash its global workforce by 15 per cent over the next two years, an unprecedented culling by North America’s biggest oil explorer as it struggles to preserve dividends.
  • Royal Dutch Shell Plc tried to lift itself out of the deepest share-slump in a quarter-century, promising more cash for shareholders even as its business is buffeted by climate change and the coronavirus pandemic.
  • For fragile oil markets, the outcome of next week’s U.S. election poses yet another risk: the prospect that major producer Iran may regain its role in international trade.