Oil in New York closed below $40 a barrel for the first time in a month as a selloff in broader markets exacerbated concerns over weakening demand following a sluggish summer driving season.
U.S. benchmark crude futures tumbled nearly 4% on Friday, leading oil to post its worst week since June. Stocks weakened and the S&P 500 Index dropped more than 3% before easing losses. Meanwhile, the upcoming U.S. Labor Day holiday will mark an informal end to the summer driving months and a customary drop-off in demand is looming with refineries soon shutting for seasonal maintenance.
West Texas Intermediate crude fell 4.5% to $39.51 a barrel.
“It’s a big psychological level” said Bob Yawger, director of the futures division at Mizuho Securities USA. “Settlement below $40 a barrel and the fact that we have turnaround season,” creates conditions where it’s “impossible make a bullish argument.”
Crude is off to a weak start in September as coronavirus flare-ups in various parts of the world threaten a sustained rebound in oil consumption at a time when the Organization of Petroleum Exporting Countries and its allies are returning oil to the market and easing historic output curbs. Russia’s energy minister said demand has returned to 90% of pre-Covid levels, but limited travel and work from home arrangements are slowing down the recovery.
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“This has been the summer driving season that wasn’t,” said John Kilduff, a partner at Again Capital LLC. “The demand situation just continues to haunt this market.”
Meanwhile, key refineries are still recovering from storms that swept through the U.S. Gulf Coast last week. Citgo Petroleum Corp. and Phillips 66Lake Charles refineries in Louisiana may be facing many more weeks of downtime as they wrestle with loss of power and damage related to Hurricane Laura.
Plus, with profit margins so low, “refineries are not really in a rush to come back into service after Laura,” said Gary Cunningham, director of market research at Tradition Energy. “That is bearish to crude because we do have some pretty good stockpiles right now.”
Despite six straight weeks of declines in crude stockpiles in the U.S., inventories are still at the highest seasonally in more than a decade, Energy Information Administration data show.
Physical markets are showing a mixed picture. Mars Blend, a high-sulfur crude, is trading at its highest premium to WTI futures in nearly two weeks. Meanwhile, Bakken crude for delivery at Clearbrook, Minnesota, fell this week to its largest discount to Nymex oil futures since early August, before recovering slightly in recent sessions.
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