Oil Extends Drop After Saudi Price Cuts Show Demand Concern

The kingdom also lowered prices to the U.S. for the first time in six months.

08 Sep 2020, 09:53 AM IST

Oil Extends Drop After Saudi Price Cuts Show Demand Concern

Workers repair the damaged facility at Saudi Aramco's Khurais oil field plant following a drone attack in Khurais, Saudi Arabia. (Photographer: Faisal Al Nasser/Bloomberg)

(Bloomberg) -- Oil extended its retreat below $40 a barrel after Saudi Arabia cut pricing for October crude sales as demand stuck below pre-Covid levels.

Futures in New York dropped after Saudi Aramco reduced its key Arab Light grade more than expected for shipments to Asia, a signal that fuel consumption in the largest oil-importing region is wavering. The company also lowered prices to the U.S. for the first time in six months.

See also: Saudi Oil-Price Cuts Soothe Asian Buyers Hit by U.A.E. Curbs

The move compounded losses in the American West Texas Intermediate crude benchmark, which fell 7.5% last week as the virus crisis appeared to stage a comeback in parts of Europe, while cases in India surged. In China, crude imports fell for a second month in August, and will probably remain lower as independent refiners run out of quotas after a buying binge earlier this year.

“Prices were perhaps overdue a bit of a correction,” said Paul Horsnell, head of commodities research at Standard Chartered Bank. “The demand recovery coming in a bit flatter than early expectations has been one of the key themes in fundamental data over the past couple of months.”

Prices
WTI for October delivery fell 70 cents to $39.07 a barrel as of 4:07 p.m. in New York Brent for November settlement dropped 1.52% to $42.01 a barrel

The difference between Brent for December this year and next is now the biggest since May. That structure, known as contango, suggests traders continue to be concerned about the market outlook in the coming months. It’s a similar picture for WTI too.

Global oil demand may not get back to pre-virus levels for another two to three years, Russian Deputy Energy Minister Pavel Sorokin told the Rossiyskaya Gazeta newspaper. The nation’s president spoke with Saudi Arabia’s king, and both men were satisfied with OPEC+ compliance, the Kremlin said.

“Piled-up storage and uncertainty over China’s oil demand cloud oil markets’ recovery,” said Bank of China International analysts, including Xiao Fu, in a research note on Monday. “Currently adequate oil supply, fears of reduced OPEC+’s compliance and the end of U.S. summer driving season bring headwinds to oil in the short term.”