Oil tumbled to the lowest level in more than three weeks with the expectation that refinery demand for crude will weaken in the fall and as investors sought refuge in a stronger dollar.
Futures in New York declined 2.9% on Wednesday. While a U.S. government report showed shrinking domestic crude and gasoline inventories, many refineries will soon halt operations to conduct maintenance. Such work is typically carried out in the fall to coincide with a downturn in summertime fuel consumption. It’s a reminder to investors that both oil and gasoline demand, already depressed from a pandemic-driven lull in travel, may further weaken.
West Texas Intermediate crude fell 2.8% to $41.56 a barrel. Meanwhile, the U.S. dollar rose the most in two weeks, reducing the appeal of commodities priced in the currency.
The dollar gaining strength is weighing on prices, but at the forefront is a looming dropoff in demand, said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. If the pandemic leads to school shutdowns and offices remaining closed, it’s going to have a strong “impact on demand for gasoline going into the refinery maintenance season and the end of the year.”
Although U.S. benchmark crude futures have rebounded from April’s negative territory, price rallies remain limited amid uncertainty over when oil consumption will return to normal with virus cases spiking in new American hot spots like Iowa and South Dakota. Demand may also take a hit over September and October as Chinese imports ease with state-issued quotas for independent refiners dwindling following a crude-buying spree earlier this year.
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In the U.S., an Energy Information Administration report showed crude stockpiles fell by more than 9 million barrels last week.
“Even with this draw, we have more than enough inventory to cover a poor demand picture,” said Andrew Lebow, senior partner at Commodity Research Group. “We really need demand to step it up a lot coming up in the next few months in order to work off this inventory,” which is unlikely as refineries start going into turnaround.
Additionally, the refining margin for combined gasoline and diesel -- a rough measure for the profitability of processing a barrel of crude -- is at its lowest in nearly a decade for this time of year.
In the wake of weak profit margins, “the refiner has no financial incentive to come back to full production and run the refinery hot,” said Bob Yawger, director of the futures division at Mizuho Securities USA.
Yet, it’s important to keep in mind that this week’s EIA report is also the first to take into account the impact from Hurricane Laura last week, such as declining oil output. U.S. production fell below 10 million barrels a day for the first time since 2018.
“That lower production was a lion’s share of the reason we saw the larger crude oil draw than was anticipated,” said Brian Kessens, a portfolio manager at Tortoise.
©2020 Bloomberg L.P.
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