Red Flags Point to Faltering Recovery in Oil - The Wall Street Journal

Market conditions suggest a surplus of oil is bearing down on near-term prices.
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Aug. 20, 2020 8:11 am ET

After rebounding from a historic crash this spring, the oil market is back under pressure from the twin forces of rising supply and stalling demand.

Futures for Brent crude, the benchmark in international energy markets, fell 1% to $44.94 a barrel Thursday after a group of major producers said the recovery in demand from the Covid-19 shock had been unexpectedly slow. West Texas Intermediate, the main U.S. oil gauge, also slipped.

Oil futures have leveled off over the summer after months of being racked by bouts of acute volatility. But signs of weakness have emerged under the surface of the market, pointing to a long-lasting glut that is likely to keep a lid on prices.

Slowing oil purchases by China and a resurgence in virus cases in Europe are undermining the bounceback in energy demand, which had been eviscerated by shelter-in-place orders. Adding to the pressure, the Organization of the Petroleum Exporting Countries and its allies have relaxed record output cuts they imposed earlier in the year to spark a rally in prices.

“The overall demand and oil-balance recovery has lost a bit of steam in August,” said Paul Horsnell, head of commodities research at Standard Chartered. “There seems to be always at least one spare cargo left over.”

One red flag: Brent contracts that are close to expiring have fallen below futures for delivery at later dates. On Thursday, it cost $45.95 to buy a barrel of Brent for December, around $1 a barrel more than the price of oil for delivery in October.

This market condition, known by traders as contango, indicates that a surplus of oil is bearing down on near-term prices. It acts as an incentive for traders to put oil into storage until they can sell it for a higher price down the line.

Another bellwether, the gap between prices for West African crude oil and Brent, also suggests the pace of the demand recovery has cooled.

Nigerian oil trades on a short-term basis and can be shipped to both Europe and Asia, making it highly sensitive to global shifts in demand. Prices of four Nigerian grades of crude—Bonny Light, Qua Iboe, Forcados and Bonga—have fallen below Brent in August, according to an index compiled by S&P Global Platts.

“Exuberant crude purchasing in Asia when prices were cheap has diluted much of the need for spot West African cargoes,” said Iain Stevenson, head of crude-oil pricing for Europe, the Middle East and Africa at Platts.

Chinese oil imports have relented after the world’s second-largest economy snapped up cargoes at a record pace in recent months, according to traders and analysts. Oil refiners in the country have large inventories of crude to work through, while congestion at ports has made it difficult for new tankers to arrive. China’s worst flooding in decades has also curtailed fuel demand.