Oil prices tumbled by about 8 per cent a barrel overnight, fuelled by renewed concerns about demand destruction as new cases of coronavirus tick up globally, while crude inventories hit a record in the United States.
US coronavirus cases surpassed 2 million on Wednesday, according to a Reuters tally, and new infections are rising slightly after five weeks of declines. While most states have loosened restrictions on movement that shackled demand, fuel consumption remains 20 per cent below typical levels, as consumers remain cautious.
The US Federal Reserve has expressed concern that this will continue, limiting demand.
“A series of local spikes could have the effect of undermining people’s confidence in travelling, in restaurants, entertainment,” Fed Chair Jerome Powell said on Wednesday.
Brent crude futures fell $US3.18, or 7.6 per cent, to settle at $US38.55 a barrel. US West Texas Intermediate (WTI) crude fell $US3.26, or 8.2 per cent, to settle at $US36.34 a barrel. Brent and WTI posted their worst daily drops since April 21 and 27, respectively.
The weakness extended to other asset classes. Equity markets dropped, with the S&P 500 Index down 4 per cent on the day, while US Treasury bonds rallied.
Crude futures have gained in recent weeks as government-imposed lockdowns eased, prompting optimism that fuel demand would recover. In parts of Asia and Europe, where the lockdowns were more severe, demand has recovered more sharply.
The Fed said US unemployment was set to reach 9.3 per cent at the end of 2020 and it would take years to fall back, while interest rates were expected to stay near zero at least through next year.
If demand does not recover, US refiners and shippers will find themselves with further excess supply. US crude inventories rose unexpectedly by 5.7 million barrels last week to a record 538.1 million barrels, largely built on Gulf Coast imports from Saudi Arabia, government data showed on Wednesday.
US gasoline stockpiles also grew more than expected to 258.7 million barrels. Distillate inventories, which include diesel and heating oil, rose by 1.6 million barrels, although the increase was smaller than in previous weeks.
“The reality is we have glut levels of global fuel inventories,” said Gene McGillian, director of market research at Tradition Energy. “The fundamental picture still has bearish factors that the market was turning a blind eye to.”
Some OPEC+ countries, including Iraq and Nigeria, have not complied with a supply cut pact by the group. Nigeria exceeded its quota for production cuts under the deal by a little less than 100,000 barrels per day (bpd) in May, the head of the Nigerian National Petroleum Corporation Mele Kyari said on Wednesday.
The Organisation of the Petroleum Exporting Countries, Russia and other producers, a group known as OPEC+, made a deal to cut about 10 per cent of global supply. That pact was extended through July over the weekend.