By Stella Goh
Oil sinks below $40 per barrel with its demand drop off looming after the Saudi Arabia cut pricing for October crude sales as the summer driving season winds down with many countries due to the control of Covid-19 pandemic.
After the Saudi Armco reduced its key Arab Light grade by a large-than-expected amount for shipments to Asia, the futures in New York was gloomy as it slipped 1.5% in Asian trading. The kingdom also lowered its prices to the US for the first time in six months.
The U.S. West Texas Intermediate Crude skidded 7.5% last week due to nervousness over the demand and a rout in stocks, the biggest loss since June. The infection rates in the US have slowing down but the pandemic appears as staging in parts of Europe and cases in India are still surging.
Due to a still-tepid demand backdrop and a continued increase in output from the OPEC+ alliance after the crude is off to a poor start in September. According to an economist at Oversea Chinese Banking Corp in Singapore, Howie Lee, price correction is overdue and weakening margins for major fuels such as diesel may potentially become a concern. He also stated that any rally in prices will face headwinds as long as crude oil inventories remain materially high.
Prices
Brent’s three-month time spread was US$1.48 per barrel in contango. The prompt prices are cheaper than later-dated contracts compared with US$1.09 in the contango a week earlier. The changes in the market structure of the global crude benchmark indicates the concern about oversupply is increasing.
According to the Russian Deputy Energy Minister Pavel Sorokin, the global oil demand may not get back to pre-virus levels for another two to three years. However, Energy Minister Alexander Novak said the oil prices are likely to recover to average US$50 to US$55 a barrel in 2021 as the development of Covid-19 vaccines spurs an economic recovery.
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