The outbreak of new Covid-19 cases in the US has re-ignited investors fears of a prolonged slump in global demand, sending the price of oil sharply lower, as giant Shell counted the costs in billions of the pandemic crisis.
The price of a barrel of Brent crude oil -- one of a number of benchmarks to determine global wholesale prices -- fell by 65 cents to just over $41 as fears resurfaced about the outlook for the world economy.
A resurgence in recent days of new cases across some of the sunshine states in the US, and an extended lockdown of Leicester City in the UK, has unsettled investors who were hoping for a relative speedy upturn in the output of major economies.
The price of Brent crude is still trading well above the $10 a barrel in April when the slump in demand from the global pandemic was also fuelled by huge amounts of supply pumped by some Opec producers.
The price of a barrel of Brent is nonetheless over 20% lower than in June 2019. Economists have said the slump in the price of oil will help offset to a small extent the huge economic effects entailed by Covid-19 around the world.
However, the scale of the hit to incomes and fears of a return to mass unemployment will outweigh the benefits of lower fuel prices for some time.
Shell said it will write down between $15bn (€13.3bn) and $22bn (€19.5bn) in the second quarter, as the company gave investors a wider glimpse of just how severely the coronavirus crisis has hit Big Oil.
The pandemic left no part of the energy giant’s sprawling business unscathed. Shell lost money from pumping oil, fuel sales fell and shipments of everything from liquefied natural gas to petrochemicals suffered.
The lockdown-induced slump has permeated through the entire industry, which is reassessing both the value of its assets and longer-term business models. Shell’s large LNG business, which is central to its vision of the future of energy, is seen taking the biggest hit.
With the coronavirus running rampant across southern and western America and many states pausing or reversing reopening measures, the outlook for energy demand in the world’s largest economy remains uncertain. Oil prices are also being put under pressure by the prospect of returning supply from Libya and a steadily rising dollar.
Though crude is heading for a 10% gain this month and the market is in much better shape than a couple of months ago, global consumption is still a long way off pre-crisis levels. Fuel demand in the US is under threat again with the virus restraining public activity. Shell painted a bleak picture of the industry as it forecast billions of dollars of asset writedowns.
“We still believe it is difficult to justify significant upside in prices in the near term due to the high levels of inventory, continued weakness in refinery margins and the fear over a severe second wave of Covid-19,” said Warren Patterson, head of commodities strategy at ING Bank.
Still, in a bright spot for the oil market, China’s recovery is continuing with manufacturing data for June beating estimates, pointing to stronger demand from the world’s largest consumer.