Demand fears are once again rippling through the oil patch as US oil prices plunged 7% to $36.76 a barrel. This represents crude’s worst day and lowest closing price in nearly three months. At one point, oil was down as much as 9% with Brent crude, the world benchmark, falling below $40 a barrel for the first time since late June.
The fierce selling in the energy market is being driven largely by rising concerns about how much crude the world economy needs during these torrid times. Summer driving season is over and jet fuel demand remains extremely weak because many people don’t want to fly during the pandemic.
“Demand is down. Supply is up,” said Robert Yawger, director of energy futures at Mizuho Securities. “The economic laws of survival are being violated on both ends of the spectrum.”
The selloff comes after Saudi Arabia, the de facto leader of OPEC, slashed its official selling price to Asia and the United States. It’s never a good sign when the world’s leading oil exporter feels compelled to cut prices to draw buyers.
“That is a double-blinking warning sign,” said Yawger. “OPEC kind of panicked today by putting out a bad signal to the energy community.” The latest turmoil in the oil market comes during major turbulence in the stock market.
The Nasdaq plunged Tuesday for the third day in a row whiles major pandemic frontrunners like Tesla (TSLA), Apple (AAPL) and Zoom (ZM) are down much more.
“Oil is getting caught up in the risk-off trade,” said Jeff Wyll, energy analyst at Neuberger Berman. He added that “nothing changed” in the fundamental supply/demand picture for oil to “warrant this kind of drop.”
Just as investors are hitting the exits on tech stocks, they are also rushing out of oil stocks.
“Everyone is trying to get out at once. There is an avalanche of sell orders,” said Mizuho’s Yawger.
Apache (APA), Occidental Petroleum (OXY) and Diamondback Energy (FANG) all tumbled more than 6%. ExxonMobil (XOM) also retreated by 3%.
“Oil demand globally is really sluggish. All of the low hanging fruit from the global oil recovery has already happened,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets
The pandemic, along with a price war between Russia and Saudi Arabia, caused oil prices to implode this spring. US oil prices even briefly turned negative for the first time ever, bottoming at -$40 a barrel.
But unprecedented production cuts from OPEC and Russia helped trigger a V-shaped recovery in the energy market. Just seven weeks after bottoming, US crude returned to $40 a barrel. That led OPEC and Russia to agree to slowly increase production from very low levels.
The Bank of America warned in a report that it will take three years for global oil demand to “normalize.”
“Business travel likely won’t recover until there is widespread access to a coronavirus vaccine”, United Airlines (UAL) Chairman Oscar Munoz added.
