Oil Prices Tumble on Faltering Recovery in Demand -- Update

Oil prices slumped to their lowest level in more than two months Tuesday, under pressure from a stalling recovery in demand and planned production expansions by OPEC that threaten to add to an existing glut of crude.

Futures tied to West Texas Intermediate, the benchmark grade of U.S. crude oil, tumbled 5.9% to $37.42 a barrel in New York, their lowest price since mid-June. Brent-crude futures, the international benchmark, dropped 3.7% to $40.44 a barrel. WTI was partly catching up with Monday's drop in Brent prices, when U.S. markets were closed for Labor Day.

Record oil imports by China, the return of automobiles to U.S. 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 the Organization of the Petroleum Exporting Countries is boosting output. All these factors have combined to pull prices back down.

"Right now the market is coming back to reality," said Eugen Weinberg, head of commodity research at Commerzbank. " The problem is that gasoline demand in the U.S. 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.

A strengthening dollar added to the pressure on oil. The WSJ Dollar Index, which tracks the U.S. currency against a basket of others, gained 0.4%, making commodities bought and sold in dollars more expensive for buyers outside the U.S. The crude drop in prices weighed on shares in oil producers Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) ahead of the opening bell in New York.

High-frequency data in the U.S. show gasoline demand is around 8-10% below its level from this time last year and has stopped playing catch-up, Mr. Weinberg said. Meanwhile, inventories in China are brimming after refiners stocked up on cheap oil from May through July.

The volume of crude oil imported by China fell 7.4% in August from a month before, to 47.48 million metric tons, according to Australia & New Zealand Banking Group. Imports will continue to slip in September and October, according to Helge André Martinsen, senior oil analyst at Norway's DNB Markets.

Saudi Arabia's national oil company, commonly known as Saudi Aramco, cut most of its prices this weekend for crude exports to the U.S., Asia and Northwest Europe for October. Analysts said the decision signaled that the kingdom, which produced almost 10% of the world's crude in 2019, is taking steps to bolster flagging demand for its oil.

The pressure on prices is likely to build in the coming months, traders and analysts said. One reason is that OPEC and its allies are on track to ease the historic production cuts they imposed this spring.

Scheduled increases to production will add to global supplies of oil, when price declines show the cartel needs to implement more stringent cuts, said Edward Marshall, a commodities trader at Global Risk Management. "There's no real bright spots."

Another challenge facing the market: refiners are struggling to make money, prompting them to cut the amount of crude they buy to process into higher-value products. The gap between gasoline and WTI prices, a gauge of refinery profit margins known as the crack spread, has fallen 14% this month to $9.46 a barrel.

"Covid-19 has just absolutely killed the more inefficient refineries and now they have negative refining margins, so they can't work at all," said Bjarne Schieldrop, chief commodities analyst at Swedish financial group SEB. "You have refineries going out of business and a huge surplus of capacity."

Financial players have grown less optimistic about oil prices. Bullish wagers on WTI futures and options outnumbered bearish positions by just 8,104 contracts on Sept. 1, according to the Commodity Futures Trading Commission. That position stood at almost 100,000 contracts on April 21, the day after WTI futures turned negative for the first time, FactSet data showed.

David Hodari

contributed to this article.

Write to Joe Wallace at Joe.Wallace@wsj.com

  (END) Dow Jones Newswires
  09-08-20 0850ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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