U.S. and global oil prices fell by roughly 6% on Tuesday to enter correction territory, as renewed lockdowns in Europe to combat the coronavirus pandemic looked likely to crimp energy demand.
“Optimism around a swift global economic recovery has recently been dampened by setbacks in vaccine rollouts in parts of Europe and Southern Asia,” said Christin Redmond, commodity analyst at Schneider Electric, in a market update.
Meanwhile, “U.S. refineries continue to struggle to come back online following the mid-February winter storm, which has resulted in several consecutive weeks of crude inventory builds.”
West Texas Intermediate crude for May delivery CL.1 CLK21 lost $3.80, or 6.2%, to settle at $57.76 a barrel on the New York Mercantile Exchange. Front-month prices have fallen 12.6% from the recent high of $66.09 on March 5 to enter correction territory, according to Dow Jones Market Data.
Both WTI and Brent crude logged their lowest front-month contract settlements since February.
Germany, Europe’s largest economy, extended its lockdown measures by another month to April 18, and imposed several new restrictions in an effort to drive down the rate of coronavirus infections.
“A surge in virus cases in mainland Europe, where the rollout of vaccines has been painfully slow, has cast doubt on resumption of travel in the region…Among other things, this is hurting demand projections for crude oil and holidays,” said Fawad Razaqzada, market analyst at ThinkMarkets, in a note.
While Europe is struggling with extended shutdowns, the opposite is happening in the U.S., noted Carsten Fritsch, analyst at Commerzbank, where a continued easing of social distancing restrictions, vaccine rollouts, and the release of government financial aid checks are expected to boost demand for crude in the world’s largest oil-consuming country.
The divergent trends were evident in the crack spreads — the differential between products produced from a barrel of crude and the crude itself — on either side of the Atlantic. He noted that the gas oil/Brent crack spread in Europe remains very low, below $5 a barrel. By comparison, the comparable U.S. spread is seen around $15 a barrel.
Among other factors influencing trading, tensions between Saudi Arabia and Yemen rebels have provided some support for oil prices this month. On Monday, the Saudis proposed a cease-fire with Iran-aligned Houthis in Yemen.
Political tensions in the Middle East would normally raise oil prices, but “amidst present oversupply, those factors are not in play,” said Manish Raj, chief financial officer at Velandera Energy.
Raj said S&P Global reported that Saudi Arabia is drawing from its inventory to grow its exports, even though the country made voluntary production cuts.
“As a result of Saudi’s drawing from their inventory, the market remains well supplied,” he said, adding that when OPEC+ agreements call for production cuts, there are no restrictions on producers selling from their inventory.
The Saudi-led Organization of the Petroleum Exporting Countries, along with their allies — together known as OPEC+ — plan to meet next week. Traders are looking ahead to the meeting with the “hope that the group will roll over its production cuts amidst demand uncertainty,” Raj said.
Over in the U.S., weekly supply data will be released late Tuesday by the American Petroleum Institute late Tuesday, followed by official data from the Energy Information Administration Wednesday.
On average, analysts expect the EIA to report domestic crude supplies down 1.7 million barrels for the week ended March 19, according to an S&P Global Platts survey, which also forecasts weekly supply increases of 900,000 barrels for gasoline and 200,000 barrels for distillates.
April natural gas NGJ21,