Oil Dives With Investors Fleeing Risk Assets Over Economic Fears

(Bloomberg) -- Oil’s afternoon attempt to hold a rally failed after a breakdown in U.S. equities added to growing negative sentiment spurred by signals of a global economic slowdown.

The coronavirus pandemic is causing a deepening demand fallout from the U.S. to Asia. In America, Congress and the White House face a looming deadline to pass another round of virus relief just as jobless claims rose for the first time since March. In South Korea, data showed the nation’s economy sliding into a recession.

The S&P 500 Index fell as much as 1.6%, while crude futures in New York tumbled by the most in two weeks on Thursday after earlier receiving a boost from a weaker dollar.

Crude is “tied at the head with equity markets here in a risk-off” move, said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. “This is mainly the virus basically bleeding into the economy, bleeding into demand for crude oil.”

Crude futures have been caught in a tight range over the past two months as reports of government stimulus and vaccine progress failed to overcome prospects for languishing demand amid a resurgent pandemic. Plus, the OPEC+ alliance is a little over a week away from unleashing crude back onto the market and in the U.S., inventories are already at the highest seasonal level in decades.

In the U.S., virus cases are continuing to surge and government data this week showed fuel demand weakening with measures to contain the pandemic keeping drivers off the road. Coronavirus cases across the U.S. increased 1.8% in the past 24 hours, deaths in Florida broke a record and California reported a faster pace of new infections.

Meanwhile, in China, severe flooding may reduce the nation’s demand for gasoline and gasoil by as much as 5%, according to Facts Global Energy. The outlook for demand isn’t much better in Europe either, with Finnish refiner Neste Oyj predicting demand for oil products will remain “severely reduced” in the third quarter.

“We have a huge amount of oil around the world in inventory that’s going to have to be eaten through,” said Gene McGillian, vice president of market research at Tradition Energy. “We need to see constant signs that demand is picking up and things are returning to normal” for prices to move higher.

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