Oil prices drop as bleaker fuel demand outlook weighs on market

By Yuka Obayashi

TOKYO (Reuters) – Oil prices edged lower on Tuesday as worries over a slow recovery in global fuel demand, depressed by the coronavirus pandemic, chimed with bleak outlook warnings by major oil producers.

Brent crude (LCOc1) was down 4 cents, or 0.1%, at $39.57 a barrel by 0642 GMT, while U.S. West Texas Intermediate (WTI) crude futures (CLc1) were down 2 cents, or 0.1%, at $37.24 a barrel. Both contracts ended slightly lower the previous day.

Still, losses were limited by short-covering ahead of a key meeting later this week of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, to discuss compliance with their programme of ambitious output cuts to prop up prices.

“Sentiment in oil markets remained gloomy due to the bleak demand outlook by oil producers and as a resurgence in COVID-19 cases in many countries fuelled concerns over slower pick-up in global fuel demand,” said Chiyoki Chen, chief analyst at Sunward Trading.

“Brent and WTI are likely to stay between $35 and $40 a barrel until U.S. demand for heating oil starts picking up as the peak driving season has ended,” he said.

Major oil industry producers and traders are forecasting a bleak future for worldwide fuel demand, due to the pandemic’s ongoing assault on the global economy, with OPEC downgrading its oil demand forecast and BP (L:BP) saying demand might have peaked in 2019.

World oil demand will tumble by 9.46 million barrels per day (bpd) this year, OPEC said in a monthly report, more than the 9.06 million bpd decline expected a month ago.

Worries over an increase in global supply after Libyan commander Khalifa Haftar committed to ending a long-running blockade of oil facilities also dented risk appetite.

“Some investors moved to cash in profitable short positions ahead of the OPEC+ meeting,” said Hiroyuki Kikukawa, general manager of research at Nissan (OTC:NSANY) Securities.

The OPEC+ joint ministerial monitoring committee (JMMC) is meeting on Thursday to discuss compliance with deep cuts in production, although analysts do not expect further reductions to be made despite Brent prices falling below $40 per barrel in recent days.

Concerns over supply disruptions in the United States from an impending storm also provided some price support.

Energy companies, ports and refiners raced on Monday to shut down as Hurricane Sally grew stronger while lumbering toward the central U.S. Gulf Coast, the second significant hurricane to shutter oil and gas activity in the past month.

“Still, the support is limited as oil prices came off quickly after the first hurricane passed, with energy companies being able to make proper preparations ahead of time,” Sunward’s Chen said.

Meanwhile, China’s crude oil throughput in August rose from a year ago, reaching the second-highest on record, as refineries worked to digest record imports brought in earlier this year.