(Bloomberg) — Oil extended its retreat below $40 a barrel after Saudi Arabia cut pricing for October crude sales, as demand struggles to fully recover from the coronavirus outbreak.
Futures in New York dropped 1.7% after Saudi Aramco reduced its key Arab Light grade by a larger-than-expected amount for shipments to Asia in a sign that fuel demand in the largest oil-importing region is wavering. The company also lowered prices to the U.S. for the first time in six months.
See also: Saudi Oil-Price Cuts Soothe Asian Buyers Hit by U.A.E. Curbs
The move compounded losses in the American West Texas Intermediate crude benchmark, which fell 7.5% last week as the demand impact from the coronavirus outbreak continues to weigh on markets. While infection rates in the U.S. are slowing, the pandemic appears to be staging a comeback in parts of Europe and cases in India are still surging.
Crude is off to a poor start in September amid a still-tepid demand backdrop and a continued increase in output from the OPEC+ alliance. Chinese crude imports fell for a second month in August, and the world’s biggest importer is expected to purchase much less in September and October than it did in May and June as independent refiners run out of quota after a buying binge earlier this year.
“Prices were perhaps overdue a bit of a correction,” said Paul Horsnell, head of commodities research at Standard Chartered. “The demand recovery coming in a bit flatter than early expectations has been one of the key themes in fundamental data over the past couple of months.”
The difference between Brent for December this year and next is now the biggest since May. That structure, known as contango, suggests traders continue to be concerned about the market’s outlook in the coming months. It’s a similar picture for WTI too.
Global oil demand may not get back to pre-virus levels for another two to three years, Russian Deputy Energy Minister Pavel Sorokin told the Rossiyskaya Gazeta newspaper. However, Energy Minister Alexander Novak said oil prices are likely to recover to average $50 to $55 a barrel in 2021 as the development of Covid-19 vaccines spurs an economic recovery.
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