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Oil headed for its biggest monthly drop since March as renewed lockdown measures to contain the coronavirus threatened to upend a shaky demand recovery.
Futures fell as much as 2.6% in New York on Oct. 30, taking their cue from a broad market selloff with equities also sliding. At the same time, the U.S. posted a record surge in daily coronavirus infections, while new restrictions in Europe could drive the region toward another recession.
“The risk appetite in the market is definitely lower,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “The return-in-demand story is taking a lot longer to play out than oil bulls had hoped.”
A return to tougher lockdown measures will likely deter a substantive rebound in airline demand, with more restrictions in Europe prompting further cuts in airline capacity for the remainder of the year. Still, there’s some support from booming freight markets and improvements in China and India. All the while, traders are looking ahead to next week’s U.S. election and an OPEC+ meeting at the end of November.
The concerns over demand come at a time when the Organization of Petroleum Exporting Countries and its allies face a challenge in their efforts to keep supply in check with the faster-than-expected return in Libyan output. Iraq reaffirmed its support for the OPEC+ production cuts and won’t be seeking any exemption from the curbs next year, Oil Minister Ihsan Abdul-Jabbar said.
Meanwhile, Norway’s largest oil field will pump at pre-COVID levels after receiving the government’s permission last month.
“There’s a really high level of insecurity out there surrounding the election, surrounding the path of economic growth, and this new surge in infections,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “Until you get some evidence that things are starting to improve, it’s going to be tough for crude to do better.”
The futures curve also is showing signs of weakness. WTI’s front-month contract is poised to close at the deepest discount to its second-month since early September. The spread between the benchmark’s nearest December contracts, a closely watched gauge of market strength, also deteriorated.
Despite the pockets of strength in consumption, the overall outlook remains weak amid anemic refining margins. BP Plc will cease fuel production at its Kwinana refinery in Australia, which can process 146,000 barrels a day, following the idling of a plant by PBF Energy Inc. in the U.S. earlier in the week.
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