(Bloomberg) -- Oil slumped as a string of renewed lockdown measures in Europe stoked concerns about the demand outlook while the market’s underlying structure shifted to indicated near-term weakness.
Futures in New York and London fell as much as 5%, with the prompt spread on both flipping into contango. Concerns are re-emerging over the prospects for a speedy rebound in consumption as Europe’s demand recovery is set to take another hit with Germany, France and Italy all having widened lockdown measures this month. Meanwhile, coronavirus cases are surging in India and threatening the economy’s recovery from recession.
“Germany is the biggest economy in the Eurozone, and renewed lockdowns there is nothing but bad for demand,” said Bob Yawger, head of the futures division at Mizuho Securities. “There has been weakness in the North Sea market, with the implication being that the futures market has gotten way ahead of the physical market.”
There were more technical factors pressuring prices too. The nearest Brent futures contract traded at a discount to the next month for the first time since January -- a pattern known as contango that points to oversupply -- after a precipitous selloff in recent days. At the same time West Texas Intermediate fell below its 50-day moving average for the first time since November.
Tuesday’s selloff was the latest move lower in a tumultuous week in the oil market. Weakness in physical markets has grown recently, which coupled with a resurgent coronavirus in some parts of the world, has dragged crude lower. OPEC+, which is holding on to output cuts in an attempt to buoy prices, could remain cautious about any future supply increase when it meets next week if prices remain on the back foot.
“Significant speculative ‘long’ liquidation continues to weigh on the market,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “Open interest has fallen sharply in recent days as volatility-targeted funds deleverage en masse given the increased trading ranges of late.”
But the mood in broader markets was also damping sentiment. The dollar climbed, making commodities priced in the currency more expensive and an advance in U.S. Treasuries showed haven buying, adding to the risk off mood.
What Bloomberg Intelligence Says:“U.S. production costs signal that WTI is as vulnerable as it was near the 2018 peak. Even if optimistic outlooks for a quick return to pre-pandemic consumption play out, U.S. producers have plenty of incentive to keep supplying more crude than demand can absorb.”-- Mike McGlone, BI commodities strategist
The weakness in the nearest part of the futures curve comes as stockpiles built up last year are being unwound from storage, according to consultant Energy Aspects. The contango structure is unlikely to last because the removal of oil from inventories is part of the market’s ongoing re-balancing, the consultant said.
“The road to oil demand recovery appears to be full of obstacles,” said Bjornar Tonhaugen, head of oil markets at consultant Rystad Energy . “The depth of the correction is surprising in a way, as we are just about a week ahead of the upcoming OPEC+ ministerial meeting on April 1 and as the U.S. fiscal stimulus is supposed to boost market confidence.”
In the U.S., crude inventories are expected to have risen last week for the fifth straight week, according to a Bloomberg survey. The industry-funded American Petroleum Institute will reports its storage figures later Tuesday ahead of U.S. government weekly data.
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