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Oil price tumbles as lockdowns sweep Europe

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·Senior City Correspondent, Yahoo Finance UK
·2 min read
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06 September 2020, Bavaria, Munich: A woman holds a pump nozzle in her hand at a gas station and refuels a car. Photo: Sven Hoppe/dpa (Photo by Sven Hoppe/picture alliance via Getty Images)
Investors fear lockdowns across much of Europe will lead to much lower demand for fuel. Photo: Sven Hoppe/Picture Alliance via Getty Images

Oil futures dropped sharply on Monday morning as investors reasoned that a wave of second lockdowns sweeping Europe would mean lower demand for fuel than previously expected.

Brent (BZ=F) and crude futures (CL=F) fell 4% in early trade to hit five-month lows. Brent futures were changing hands for just shy of $37 (£29) a barrel, while crude futures were near $34.50.

The price slump came as traders reacted to mounting restrictions on movement across much of Europe. Over the weekend, the UK joined Germany, France and Belgium in announcing in a second national lockdown to curb the spread of new COVID-19 infections.

The orders will limit the movement of populations and likely mean lower fuel consumption. The UK’s new regulations explicitly prohibit international travel unless essential for work, for example.

“One view that is becoming more apparent for oil prices by the day is that the holiday season could turn quietly chaotic for oil markets as folks will opt to isolate rather than celebrate, possibly sending both mobility and fuel consumption even lower,” said Stephen Innes, chief global market strategist at Axi.

Jim Reid, a senior strategist at Deutsche Bank, said increased oil production in Libya was putting further downward pressure on prices. The North African nation is ramping up oil exports just as demand is falling.

READ MORE: FTSE 100 slips as UK heads into second lockdown

“Libya has already increased its daily output to 800,000 barrels (vs 100,000 barrels/day in early September),” Reid and his team wrote in a note sent to clients on Monday morning.

OPEC+ leaders are due to meet at the end of the month to discuss policy. The oil producing nations could look to cut supply to buoy up prices, as they did during the first wave of coronavirus. However, Innes said prices would need to fall much further for that to become a viable option for the bloc’s two most powerful players.

“There is no budgetary incentive for either Russia nor Saudi Arabia to cut production unless the oil price reaches mid-$20s/bbl,” he said.

Oil prices collapsed earlier in the year during the first wave of lockdowns and in fact fell into negative territory. OPEC and its allies agreed to cut production by a record 9.7 million barrels per day in April in response to plummeting demand.

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