Oil prices slumped on Thursday to the lowest level since May as new coronavirus restrictions in Europe brought back memories of March and April, when the industry was decimated by the pandemic.
Brent crude oil, the international benchmark, dipped below $37 a barrel on Thursday, with the $2 fall taking losses for the week to more than 10 per cent, the worst weekly performance in more than six months.
While traders said that the hit to fuel demand was not expected to be as large as this spring, when strict lockdowns curbed global consumption by more than a quarter, France and Germany together still account for about 4 per cent of pre-pandemic consumption.
Both countries have announced this week new measures aimed at slowing the spread of coronavirus. Tighter restrictions in other European countries now seem likely, traders say, as cases of Covid-19 continue to rise rapidly.
“Oil demand will lose ground as a result of the new lockdowns, with [motor vehicle] fuels taking a significant hit as transport will be curtailed to minimum again,” said analysts at Rystad Energy, a consultancy.
Brent had recovered from below $20 a barrel in April to trade steadily between $40-$45 a barrel for much of the summer, as the Opec+ group cut production, and travel, with the exception of air travel, rebounded back close to pre-pandemic levels.
Traders fear that the recovery is now being derailed, and oil producers are continuing to retrench. On Thursday, ExxonMobil said it would lay off 1,900 US employees, roughly 7 per cent of its workforce in the country. Exxon employed about 75,000 people worldwide at the end of last year.
The move follows similar cuts in Europe and Australia as it looks to bring down costs. The group is also currently carrying out a review of its staffing levels in Canada. It has committed to reducing capital expenditure in 2020 by 30 per cent.
Analysts estimate that the additional hit to oil demand in Europe from lockdowns could be at least 1m barrels a day next month — or roughly 1 per cent of pre-pandemic global consumption of 100m barrels a day.
Supply is also rising following the end of an oil export embargo in Libya this month, which is now expected to bring back an additional 1m b/d of supplies, something that few in the market had been anticipating.
Martijn Rats at Morgan Stanley said that the combination of lower demand and higher supply marked a “huge swing” of roughly 2m b/d for the market to absorb in such a short space of time.
“Oil prices are very sensitive to small changes,” Mr Rats said, adding that a 2m b/d shift during the 2008 financial crisis had knocked prices from a record $147 a barrel to near $30 in a matter of months.
“Surplus inventories of oil had been drawing down by roughly 1m b/d globally since June, which had helped the market recover. But quickly we could go back to building 1m b/d instead.”
Mr Rats cautioned, however, that the challenge facing the oil market was unlikely to be as tough as March and April, when lockdowns were more widespread and Saudi Arabia and Russia were initially raising production as part of a price war.
Many analysts are now betting that Opec and its allies will need to delay their plans to start returning barrels to the market in January, as market conditions have worsened.
Traders said that strength in the US dollar was also contributing to oil’s sell-off, with dollar-priced commodities like crude becoming more expensive for holders of other currencies.
“Instead of a Covid vaccine, a lethal dose of bearish infusion is being administered to the financial and oil markets,” said Tamas Varga at oil brokerage PVM in London. “One can only wonder how long until Opec+ announces the rollover of the current output ceiling.”
Additional reporting by Myles McCormick