Oil drops 8% to multi-month low on demand fears

Oil prices tumbled to their lowest level since June on Tuesday amid growing demand concerns as Covid-19 continues to spread.

West Texas Intermediate crude, the U.S. oil benchmark, slipped $3.19, or 8%, to trade at $36.60, its lowest level since June 16. International benchmark Brent crude dipped 5.4%, or $2.26, to trade at $39.75, also its lowest level since June.

“Today’s oil price move is a clear sign that the market now seriously worries about the future of oil demand,” said Paola Rodriguez-Masiu, senior oil markets analyst at Rystad Energy. “The streak of losses is driven by a stalling crude demand outlook for the rest of the year, with rising cases of Covid-19 and the end of the summer driving season in the U.S., as well as Asian refineries putting on [the] breaks,” she added.

Since WTI plunged into negative territory in April for the first time on record, oil prices have staged a big comeback. WTI jumped nearly 90% in May, and has posted monthly gains ever since. The gains were, of course, on the back of record lows, but prices moved higher as international producers scaled back production in an effort to counteract the demand drop-off caused by the pandemic.

But in recent sessions prices have begun to trend lower. WTI fell during Monday’s session after registering a 7.45% loss in the prior week, snapping a four-week win streak and posting its worst weekly decline since June.

Tuesday’s move lower followed Saudi Aramco cutting its official selling prices for October, which RBC’s Helima Croft said triggered new demand concerns.

In a recent note to clients, Bank of America said that it will take three years for demand to recover from Covid-19, assuming there’s a vaccine or cure. The firm believes peak oil will come as soon as 2030 due in part to electric car proliferation.

Rising U.S.-China trade tensions, as well as production coming back online also pressured prices on Tuesday, as did a stronger U.S. dollar.

“The market has its eye on the big picture: where and when we see demand normalize globally and what happens with both US production and OPEC+ agreement over the medium term,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management.