The fact that West Texas oil is in a steeper decline than Brent shows that the U.S. is in a particularly bad spot, says one analyst.
David McNew/Getty ImagesOil prices took a sharp dive lower on Tuesday, with Brent crude crossing the $40 threshold as it fell for the fifth day in a row. Investors are waking up to the fact that Americans still aren’t moving around in normal ways as the fall begins, and Covid-19 continues to disrupt the economy. For most people, the traditional high-activity back-to-school season has been curtailed, if not eliminated altogether.
Brent crude futures, the international benchmark, were down 5.3%, to $39.80, on Tuesday. West Texas Intermediate futures fell 7.7%, to $36.71. Oil stocks were dropping, with Chevron (ticker: CVX) down 3.9% and producer EOG Resources (EOG) falling 6.5%. Refiners were dropping too, with Valero Energy (VLO) off 2.9%.
For the past two months, both Brent and West Texas oil have mostly held above $40, allowing some producers to restart drilling projects. But the latest downturn threatens that progress.
“Today’s oil price move is a clear sign that the market now seriously worries about the future of oil demand and not just plays a bearish-bullish daily trading game that sends prices swinging,” said Paola Rodriguez-Masiu, an analyst at Rystad Energy. “Hard-earned gains have been erased, starting last week, and if you thought Monday was a depressing day, Tuesday is here to show that the price decline is not coincidental.”
On Monday, Brent prices fell 1.5%, while Texas oil didn’t trade because of the Labor Day holiday.
The fact that West Texas oil is in a steeper decline than Brent shows that the U.S. is in a particularly bad spot, Rodriguez-Masiu noted.
“If anything, today’s price move show that most trading concern now falls on the U.S., where things are going south despite the market scrambling to find positive news to keep prices healthy,” she said.
Last week, Brent fell 6.9% and West Texas oil fell 7.4%, their worst drops since June. U.S. gasoline demand fell week over week, according to U.S. government statistics, a key indicator that people weren’t moving around as much even at the height of the summer driving season.
Analysts are predicting an extended downturn. Bank of America strategist Francisco Blanch wrote on Tuesday that “it could take a few years until all segments of oil consumption surpass levels seen prior to the Covid-19 shock.”
On the plus side, “road traffic has almost fully recovered and we expect global oil demand from road use to be in positive year-on-year growth territory by the end of this year,” he wrote. But not enough people are willing to get on airplanes. It could be three years before oil demand normalizes, he wrote. The longer-term outlook for oil is also shaky.
By 2025, oil demand could rise to 104 million barrels a day, about 4 million barrels above its previous highs. But its surge is likely to be curtailed by the rise of electric vehicles. In fact, peak oil demand could hit as soon as 2030, Blanch predicts. So once oil recovers from Covid, it could have a very short heyday before it peaks for good.
“In our base case we see EVs in light duty vehicles (LDV) rising to 34% of sales by 2030 and 95% of sales by 2050, which suggests oil demand will peak at around 105 million barrels per day by 2030 and decline to 95 million barrels per day by 2050,” he wrote.
Write to Avi Salzman at avi.salzman@barrons.com
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Oil Tumbles Below Critical $40 Level - Barron's
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