An oil rig in Cape Town harbour.
An oil rig in Cape Town harbour. (Photo by: Education Images/Universal Images Group)

  • Oil prices slumped another 4% on Monday, after fresh virus-induced lockdowns in Europe and US Covid-19 cases broke the global daily record.
  • Investors fear that new lockdown measures and retreating demand for fuel will further dent economic growth.
  • "Right now, the oil market is in the middle of a second round of forward fire-sales," Bjarne Schieldrop, chief commodities analyst at SEB, said.
  • "The holiday season could turn quietly chaotic for oil markets, as folks will opt to isolate rather than celebrate, possibly sending both mobility and fuel consumption even lower," Stephen Innes, chief global market strategist at Axi, said.
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Oil prices fell for a fourth day on Monday, losing another 4%, as investors fretted over the rise in US Covid-19 infections and the slew of new national lockdowns in Europe over the weekend.

International benchmark Brent crude futures fell 3.9%, to $36.45 a barrel, and US benchmark West Texas Intermediate dropped as much as 6%, to $34.21. The price oil has fallen by almost a quarter since late August.

The decline in prices in crude futures contracts is likely caused by US election uncertainty, amplified by rising production in Libya, European lockdowns, and a temporary halt in China teapot crude oil orders, Bjarne Schieldrop, chief commodities analyst at SEB, said.

"Right now, the oil market is in the middle of a second round of forward fire-sales for oil," he said. "The market is thus currently offering oil for 2022 delivery more or less at the same level as the 'annus horribilis' average of 2020."

Oil prices are weaker than they were in late September, but are still far off from the distressed levels seen in April and May, when the price of US crude fell to -$40 a barrel. Traders haven't just sold crude futures contracts for near-term delivery. The price for crude for delivery in two years' time has also dropped, although not as dramatically. December 2022 crude futures have fallen by around 16% in this time.

Concerns over weakening demand have eradicated all the attempts undertaken by OPEC and its allies since May, when up to 10 million barrels of daily oil production were removed from the market.

A Biden win could be supportive for oil prices in the medium term owing to stricter environmental regulations, and thus a higher marginal production cost for US shale, according to Schieldrop. Biden's backing of Iran's Joint Comprehensive Plan of Action will result in resumed production and exports from Iran in 2022, he said. 

SEB Research believes that while a Biden win is bearish for oil in the longer run, the current price of $42 a barrel for 2022 delivery is too low.

Separately, Baker Hughes data showed that the US oil rig count climbed by 32 in October, implying that domestic oil  and gas production will rise in the coming months. 

OPEC is scheduled to hold a policy meeting on November 30 and December 1. The group will likely refrain from increasing production, until the eventual rollout of Covid-19 vaccines in the first, or second, quarter next year, but no commitments have been made yet, Schieldrop said.

Neither Russia nor Saudi Arabia have the budgetary incentive to cut production unless oil reaches mid-$20's per barrel, according to Stephen Innes, chief global market strategist at Axi.

"A considerable element of uncertainty around the end of the month OPEC meeting has the oil complex hedging that might be too premature for OPEC+ to adjust at this stage," Innes said.

"The holiday season could turn quietly chaotic for oil markets, as folks will opt to isolate rather than celebrate, possibly sending both mobility and fuel consumption even lower," he said.

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