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Oil plummets to a two-month low

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on September 9, 2020 | Last updated on September 9, 2020 at 06.39 am
Opec and its allies are cutting output by 7.7 million barrels per day (bpd) until December

(AFP)

The drop came amid observations that prices would not be bouncing back to the $50 per barrel level unless Opec+ decides to deepen the current cuts

Oil prices on Tuesday slid more than three per cent, to their lowest level in two months, to $40 a barrel under pressure from a stalling recovery in demand and planned production expansions by Opec that threaten to add to an existing glut of crude.

Brent crude fell $2.18, or 5.2 per cent, to $39.83 a barrel at 1400GMT, and earlier slipped to $39.61, the lowest since June 25. US West Texas Intermediate (WTI) crude dropped $2.99 or 7.5 per cent, to $36.78.

Both oil benchmarks have dropped in their fifth session of decline. Brent has fallen more than 10 per cent since the end of August.

On Monday, crude fell after Saudi Arabia's state oil company Aramco cut the October official selling prices for its Arab light oil, a sign demand may be stuttering.

"The price weakness is continuing today," said Eugen Weinberg, an analyst at Commerzbank. "We believe this is attributable first and foremost to demand concerns."

The persistent drop came amid observations by market experts that oil prices would not be bouncing back anywhere near to the $50 per barrel level anytime soon unless Opec+ decides to deepen the current cuts.

Opec and its allies are cutting output by 7.7 million barrels per day (bpd) until December to support prices as the coronavirus pandemic hammers demand. The producers are meeting on September 17 to review the market.

"The streak of losses is driven by a stalling crude demand outlook for the rest of the year," said Paola Rodriguez-Masiu, analyst at Rystad Energy.

Still, oil has recovered from historic lows hit in April, thanks to a record supply cut by Opec+. Crude has also found support from a weaker dollar, although the US currency was up on Tuesday. The market could rally beyond $45 later this year, said Norbert Ruecker, head of economics at Swiss bank Julius Baer.

"Fundamentally, things have not changed," he said. "Demand is recovering, supply remains constrained, and the storage overhang is slowly disappearing," said Ruecker.

Meanwhile, Russian Energy Minister Alexander Novak said it was extremely important for Russia and other oil producers to quickly regain, or even raise, their market share once the demand recovers.

To ensure Russia has not lost its oil market share after a global oil production cut agreement is over in 2022, Moscow has worked out a programme of unfinished oil wells, which could be launched once the output reduction deal expires.

"Once oil demand starts returning to the pre-crisis levels, it will be extremely important for Russia and for other oil-producing countries to quickly regain market share, or even to raise it," Novak was quoted as saying by a ministry's in-house magazine published on Tuesday.

Record oil imports by China, the return of automobiles to US roads and steep production cuts fueled a rebound after crude prices crashed this spring. But Chinese purchases have slowed since mid-July, the comeback in American gasoline demand has stalled and Opec is boosting output. All these factors have combined to pull prices back down.

"Right now the market is coming back to reality," said Weinberg. "The problem is that gasoline demand in the US didn't continue to increase."

Tuesday's lurch lower ended a stretch of calm in the oil market, which didn't move much in either direction over the summer. Some traders had been bracing for a decline in prices, which they said had been trapped in a narrow range partly by bets against volatility in the options market.

issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.


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