Oil price falls below key $40 per barrel mark

lt could take three years for global oil demand to recover from the Covid-19 crisis. File picture.

The price of brent crude oil tumbled below $40 a barrel for the first time since late June and prices in New York also sunk in the wake of faltering demand and weaker equities dampening market sentiment.

Both Brent and West Texas Intermediate crude futures declined over 6% to the lowest levels in nearly three months.

A stalling consumption recovery in Asia, the end of the US summer driving season, and increased supply from the Opec+ alliance signal a bleak short-term outlook for oil prices. Equity markets also weakened, leading crude to break below the key psychological barrier.

Plus, technical indicators are also pointing to further selling pressure. Brent is flirting with its 100-day moving average, threatening to drop below it for the first time since mid-June.

“The lack of fiscal support is starting to spook the markets a little bit,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “It’s showing up in oil with fears that you’re going to reduce demand coupled with stories circulating that Opec’s discipline is less than ideal.”

Brent crude’s break below $40 a barrel follows two months of range-bound trading with the global oil benchmark holding largely between $42 and $45 a barrel. 

The coronavirus pandemic is still raging and Bank of America Merrill Lynch said it will take three years for global oil demand to recover from Covid-19, assuming there is a vaccine or a cure.

Meanwhile, only four of 10 Asian refiners surveyed by Bloomberg said they would be trying to buy more Saudi Arabian crude after the kingdom cut pricing for October as consumption remained below pre-coronavirus levels. 

Abu Dhabi National Oil Company also cut prices, the latest response to a sluggish demand backdrop in the world’s biggest oil-consuming region.

Meanwhile, market signals point to more downside risk for oil prices. 

The difference between the two nearest December contracts -- a closely watched gauge of market strength -- weakened for both Brent and WTI to their largest contango structure since May, pointing to concerns of oversupply.

The widening contango in both benchmark crude futures, combined with a slump in tanker rates, may also be starting to incentivise floating storage. Storing crude at sea has become profitable again for northwest Europe and the Mediterranean.

 Bloomberg