Oil steady after closing below $40 for first time since June

Oil steadied after its biggest one-day loss in more than two months as growing doubts over the strength of the global demand recovery along with continued weakness in stocks soured market sentiment.

Futures in London were little changed after dropping 5.3% on Tuesday to settle below $40 a barrel for the first time since June 15. Asia’s stalling demand recovery, the end of the US summer-driving season and increased supply from the OPEC+ alliance all point to a grim short-term outlook for oil prices.

Crude has also been hurt by worsening US-China relations and a retreat in global stocks, partially driven by concerns a Covid-19 vaccine may be delayed. The benchmark S&P 500 Index has fallen 7% over the last three sessions.

Brent crude’s break below 40 US dollars a barrel follows two months of the global benchmark largely holding between 42 and 45 dollars. The coronavirus pandemic is still raging and Bank of America Merrill Lynch said it will take three years for oil demand to fully recover from the outbreak even if there’s a vaccine.

Market structures point to more downside risk for oil prices. Contangoes -- where prompt prices are cheaper than later-dated contracts -- are widening for both the global and US benchmarks. That points to increasing concern about over-supply and, combined with falling tanker rates, is also starting to make storing crude at sea an attractive proposition again.

At the same time, oil traders have begun seeking out available US onshore storage, according to The Tank Tiger, an independent brokerage and consulting clearinghouse. The return of storage plays that only work when the market is glutted is bad news for producers withholding supply in a bid to prop up prices.

(Source: Hindustan Times)