Oil dropped to $66 a barrel on Thursday, its lowest since May, pressured by concerns about weaker demand as COVID-19 cases rise, a stronger U.S. dollar and a surprise increase in U.S. gasoline inventories.
Circulation of the Delta variant in areas of low vaccination is driving transmission of COVID-19, the World Health Organization said. Coronavirus-related deaths have spiked in the United States over the past month.
“The longer-than-anticipated battle against the invisible enemy has made investors cautious and pragmatic, leading to gradually softer prices,” said Tamas Varga of oil broker PVM.
“The potential withdrawal of monetary support, the chaotic Taliban takeover of Afghanistan that threatens with another migrant crisis and worries about the continuous spread of the virus keep the dollar in demand, which, in turn, acts as a break on any attempted oil-price rally.”
The dollar hit a nine-month high, weighing on dollar-priced commodities.
Brent crude was down $2.10, or 3.1%, at $66.13 at 0905 GMT, after touching its lowest since May 21. U.S. West Intermediate (WTI) fell $2.28, or 3.5%, to $63.18 after falling as low as $62.96, also its lowest since May 21.
Both Brent and U.S. crude have declined for six days in a row, the longest losing streak since a six-day drop for both contracts that ended on Feb. 28, 2020.
“Concerns about dampening demand expectations as a result of an increase in coronavirus cases worldwide have contributed to the drop,” said Naeem Aslam of Avatrade, a broker.
Oil Gains 1 Percent on Possible Tight Supply
Oil prices rose on Tuesday as analysts pointed to signs of U.S. supply tightness, ending days of losses as global markets remain haunted by the potential impact on China’s economy of a crisis at heavily indebted property group China Evergrande.
Brent crude gained 95 cents or 1.3% to $74.87 a barrel by 0645 GMT, having fallen by almost 2% on Monday. The contract for West Texas Intermediate (WTI) , which expires later on Tuesday, was up 91 cents or 1.3% at $71.20 after dropping 2.3% in the previous session.
Global utilities are switching to fuel oil due to rising gas and coal prices, and lingering outages from the Gulf of Mexico after Hurricane Ada that imply less supply is available, ANZ analysts said.
“While slowing Chinese economic growth and uncertainty around the (U.S.) Fed’s tapering timetable weighed on market sentiment, other developments still point to higher oil prices,” ANZ Research said in a note.
Still, investors across financial assets have been rocked by the fallout from heavily indebted Evergrande (3333.HK) and the threat of a wider market shakeout in the longer term.
“Evergrande’s woes are threatening the outlook for the world’s second-largest economy and making some investors question China’s growth outlook and whether it is safe to invest there,” said Edward Moya, senior market analyst at OANDA.
While that view of the state of China’s economy is weighing on markets, the U.S. Federal Reserve is also expected to start tightening monetary policy – likely to make investors warier of riskier assets such as oil.
Crude Oil Drops as U.S Dollar Extends Gain
Oil prices declined on Monday after the United States Dollar rose to a three-week high and the U.S oil rig count increased amid drop in U.S. Gulf of Mexico output.
Brent crude oil, against which Nigerian crude oil is priced, sheds $1.03 or 1.37 percent to $74.31 per barrel at 9.38 am Nigerian time. While the U.S West Texas Intermediate oil declined by $1.18 or 1.64 per barrel to $70.79 a barrel.
The recent increase in dollar strength against global currencies has dragged on crude oil outlook as energy investors cut down on imports to avoid possible market headwinds. Strong U.S. dollar priced crude oil is more expensive for holders of other currencies.
U.S dollar rose to a three-week high after retail sales unexpected rose by 0.7 percent in the month of August. The increase bolstered expectations that the U.S Federal Reserve will start cuttiing down on asset purchases later this year.
“U.S. consumption is not slowing as quickly as it appeared a month ago despite the fading stimulus, and the Delta variant did not much affect the industries feeding into retail sales,” said Chris Low, chief economist at FHN Financial in New York. “The economy continued to hum in August.”
According to the researchers at ING Bank, strong US dollar over the last few days has provided some headwinds to the market.
Also, an increase in U.S rig count to 512 in the week ended September 17, 2021 clouded the oil market. Oil rige rose by 9, the highest since April 2020.
Still, as at Friday 23 percent of U.S. Gulf of Mexico crude output, or 422,078 barrels per day, remained shut, stated the Bureau of Safety and Environmental Enforcement.
Oil Slips With Energy Prices in Europe Halts Record Rally
Oil dipped toward $72 a barrel in New York after prices of energy commodities in Europe halted a record-breaking run.
West Texas Intermediate futures fell 0.6%, having reached the highest intraday level since early August on Wednesday. A rally in European gas and power prices to unprecedented levels was set to end as industries were starting to curb consumption. The surge in energy rates could temporarily boost diesel demand by as much as 2 million barrels a day as consumers switch fuels, according to Citigroup Inc.
Still, the bullish signals for oil are continuing to increase. U.S. crude inventories dropped by more than 6 million barrels last week to a two-year low, according to government figures, as coronavirus vaccination programs permit economies to reopen. Chevron Corp. Chief Executive Officer Mike Wirth warned that the world is facing high energy prices for the foreseeable future.
The investor optimism is showing up in key oil time spreads widening. Trading of bullish Brent options also surged to a two-month high on Wednesday.
Prices have been pushed higher in recent days “by supply outages combined with expectations of switching from gas to oil in the power sector,” said Helge Andre Martinsen, a senior oil market analyst at DNB Bank ASA. “We still believe in softer prices toward year-end and early next year as curtailed production returns and OPEC+ continues to increase production.”
Strong prices for gas, liquefied natural gas and oil are expected to last “for a while” as producers resist the urge to drill again, Chevron’s Wirth told Bloomberg News. Norway’s Equinor ASA said Thursday it also expects European gas prices to remain high over winter.
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