Crude Oil Lower; European Lockdowns Spur Demand Worries

Crude oil prices weakened Thursday over doubts about the speed of the recovery in global oil demand despite the Suez Canal remaining blocked, curbing supply through this key trade route.

By 9:45 AM ET (1345 GMT), U.S. crude futures traded 2.9% lower at $59.39 a barrel, while the international benchmark Brent contract fell 2.5%, to $62.82.

U.S. Gasoline RBOB Futures were down 1.9% at $1.9510 a gallon.

The Suez Canal Authority said on Thursday it had suspended traffic temporarily while eight tugs worked to free the stranded container ship that had run aground, blocking the canal, one of the world’s most important oil shipping routes.

“Around 10% of global seaborne oil trade passes through the canal, whilst around 8% of global LNG trade also uses the canal, “ said analysts at ING, in a research note. “Clearly, the longer this disruption lasts the more likely we see refiners/buyers having to turn to the spot market to ensure supply from elsewhere.”

That said, a few days of delays in crude or product travelling through the Suez Canal to Europe and the United States is unlikely to have a prolonged impact on prices. Of more concern is the increasing number of Covid-19 cases in Europe, not to mention emerging giants Brazil and India, the associated lockdowns and disruptions to the distribution of coronavirus vaccines.

European Union leaders are meeting virtually Thursday to discuss the Covid situation, seeking agreement on how to ramp up supplies of vaccines given the slow start the bloc has made in its vaccination program.

In the physical market, Chinese independent refiners have slowed imports in the second quarter, taking cheaper oil from storage, resulting in traders cutting prices for spot cargoes for delivery to Asia.

Back in the U.S., official data from the Energy Information Administration late Wednesday showed crude inventories increased by 1.9 million barrels last week, suggesting demand is taking time to return even as the country reopens.

“Refinery activity continued to recover over the week, with utilization rates increasing by 5.5 percentage points to 81.6%, which takes refinery activity almost back to the pre-freeze levels seen in early February of around 83%,” ING added.

Next week sees the latest meeting of the Organization of the Petroleum Exporting Countries and allies, together called OPEC+, most of the globe’s top crude producers.

Prices have fallen around 4% this month, and this is raising expectations that these producers will roll over their current supply curbs into May at a meeting scheduled for April 1.