“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.”
Any supply cheats will likely encounter diminished demand. 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 Co. also cut prices on Tuesday, the latest response to a sluggish demand backdrop in the world’s biggest oil-consuming region.
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. Technical indicators are also pointing to further selling pressure. Brent crude is flirting with its 100-day moving average, threatening to drop below it for the first time since mid-June.
“Today’s oil-price move is a clear sign that the market now seriously worries about the future of oil demand,” said Paola Rodriguez-Masiu, senior oil markets analyst at Rystad Energy AS.
Coupled with concerns over the pick-up in Chinese demand, tensions are rising between the US and the world’s largest importer. US President Donald Trump said that he intends to curb the US economic relationship with China, threatening to punish any American companies that create jobs overseas and forbid those that do business in China from winning federal contracts.
Meanwhile, the difference between the two nearest December contracts -- a closely watched technical gauge of market strength -- weakened for both Brent and WTI to their largest contango structure since May.
The widening contango in both benchmark crude futures, combined with a slump in tanker rates, may also be starting to incentivize floating storage. Storing crude at sea has become profitable again for northwest Europe and the Mediterranean, shipbroker and exchange data compiled by Bloomberg.