Pump jacks operate in New Mexico.
Paul Ratje/AFP via Getty ImagesThe price of oil looked like it was climbing out of a hole at the start of the week as President Donald Trump’s health improved and Congress appeared to be getting closer to a new stimulus deal. There were other bullish factors too: A hurricane is forcing oil companies to suspend operations around the Gulf of Mexico, and a strike in Norway is hitting production there.
All those factors seemed to point to higher oil prices. But the president’s decision to end negotiations on another round of economic stimulus (one that he may or may not reverse) and a continued increase in oil inventories has reversed the momentum.
On Wednesday, the Energy Information Administration said crude inventories rose 500,000 barrels in the latest week. Analysts had expected a decline.
Brent crude futures, the international benchmark, fell 2.3% to $41.65. West Texas Intermediate futures fell 2.7% to $39.56. Oil stocks were trading flat. Chevron (ticker: CVX) stock, for example, was down 0.2%.
Absent other news, some analysts worry that oil’s slump could last through the winter.
“The partial recovery in gasoline demand over the summer driving season in the United States was a critical support for the crude complex, but now demand for gasoline is settling into a long winter’s nap,” wrote Enverus analysts in a report on Wednesday.
Crude oil is separated into different products through the refining process. With gasoline use likely to drop through the winter, demand for other products will have to rise to make up for it. The performance of so-called “middle distillates” like diesel and jet fuel will be crucial to the price of crude in the next few months.
The problem is that there’s no near-term expectation that jet fuel will rebound, because few people are flying. And refiners have already been making a lot of diesel, which is building up in storage.
“As winter approaches, middle distillates will increasingly need to drive support for crude, and that appears to be a tall order given the amount of diesel/gasoil that accumulated in inventory over the summer as refiners sought to regrade their jet fuel woes away,” the Enverus analysts wrote.
Write to Avi Salzman at avi.salzman@barrons.com
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October 08, 2020 at 03:17AM
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Oil’s Price Slump Deepens. This Time It Could Last. - Barron's
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