Oil futures inched lower on Monday, undercut by continued demand worries, as the Organization of the Petroleum Exporting Countries further reduces its outlook for demand growth, as well as the potential for more oil from Libya.
A storm in the Gulf of Mexico, however, threatens to disrupt energy output in the region, limiting losses for oil and lifting prices for natural gas.
“Losing the psychological 40-dollar mark makes traders wonder how deep the oil price decline [may] be during the second wave of the pandemic,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy, in daily market commentary.
Demand is at much better levels since the first wave of the pandemic, but it has “not recovered to levels the market hoped for, and forecast are pretty flat for the coming months,” he said. The COVID-19 pandemic is “not past us yet and new infection cases continue to mushroom around the world, which in turn affects how key oil-consuming markets work.”
And while “demand sweating to keep up, supply is accelerating,” said Tonhaugen.
The comeback of some of curtailed production from the Organization of the Petroleum Exporting Countries and their allies is starting to be “visible in the market,” with Middle Eastern producers cutting prices, onshore storages filling up and offshore storage in demand, he said.
West Texas Intermediate crude for October delivery fell 9 cents, or 0.2%, to $37.24 a barrel on the New York Mercantile Exchange, while the global benchmark, November Brent was off 10 cents, or 0.3%, at $39.73 a barrel on ICE Futures Europe.
OPEC, in its monthly report on Monday, said it now expects 2020 oil demand to contract by 9.5 million barrels a day to 90.2 million barrels a day, versus its previous call for a 9.1 million barrel-a-day fall. It also lowered its outlook for demand growth in 2021, citing the lingering effects of the coronavirus.
Also weighing on prices, analysts said, was a report by Reuters that Libyan commander Khalifa Haftar plans to halt a blockade of the oil-exporting nation’s ports.
“Unquestionably, this could put OPEC+ in an even more giant pickle when they hold a virtual meeting on Thursday to review the current production intervention level’s price impacts,” said Stephen Innes, chief global markets strategist at AxiCorp. “But one can be assured the cartel will not be happy to witness markets building a steeper contango since the last meeting.”
A contango occurs when deferred contracts are priced at a premium to nearby prices.
Rystand’s Tonhaugen said that “if Libya’s production comes back online soon, we are talking about 1 million bpd or more,” leading to a “significant addition to the global balances.”
Meanwhile, some Gulf of Mexico oil producers may idle idling production as they prepared for Tropical Storm Sally, which forecasters said could hit the New Orleans area this week as a Category 2 hurricane.
“On the forecast track, the center of Sally will move over the north-central Gulf of Mexico today, approach southeastern Louisiana tonight, and make landfall in the hurricane warning area on Tuesday,” the National Hurricane Center said Monday morning, noting that flash flooding is likely along the central Gulf Coast.
Flash flooding will “impact production and refining,” said Phil Flynn, senior market analyst at The Price Futures Group, in a daily note. A “slow moving storm can damage offshore infrastructure and flooding can sink pipelines and takeout refineries.”
For now, the storm provided support for natural gas, which saw its October contract climb by 9.1 cents, or 4%, to $2.36 per million British thermal units.
Among the oil products, however, prices were mixed, with October gasoline up 1.8% at $1.1143 a gallon, but October heating oil nearly flat at $1.0891 a gallon.