Oil prices hurt by new COVID restrictions

The price of oil lost more than 2% on Monday and oil related stocks were not spared from the selloff. 

Oil weakness

Brent crude futures were lower by around 2.1% Monday morning at $40.88 a barrel while West Texas Intermediate futures were lower by 2.2% at $38.96. The weakness can be directly attributed to a new round of restrictions to help control the spread of the COVID-19 pandemic, The Wall Street Journal reported.

Most notably, Italy and Spain re-introduced restrictions on bars and restaurants along with a nighttime curfew. The United States continues to report daily record highs of new infection cases near the 60,000 mark.

The direct result is lowering demand for gas and other fuels and comes at a time of economic weakness. The problem is that recent demand data for oil has been “pretty much universal” in one direction — down, Emily Ashford, an energy analyst at Standard Chartered Bank told WSJ.

Specifically, the world is consuming 9.6 million fewer barrels of oil on a daily basis today compared to the same period last year.

Some of the more impacted oil stocks include U.S. giant Exxon Mobil Corporation (NYSE: XOM) which was lower by nearly 3% at $33.18 and within striking distance of its 52-week low of $30.11. Elsewhere, BP plc (LON: BP) ended the day lower by 2.3% at £2.06 that is also not far removed from its 52-week low of around £1.95.

Looking for an alternative take on Exxon’s stock? This late 2019 guide makes the case that Exxon’s stock is undervalued.

OPEC concerns

Meanwhile, Libya’s central government resolved an oil-revenue distribution dispute that will lift prior restrictions. The country could be poised to increase its oil production to 800,000 barrels a day within 14 days and add 200,000 more barrels within four weeks, according to WSJ.

Libya’s rush to increase its oil production will add a new layer of complications to the Organization of the Petroleum Exporting Countries. Specifically, the oil consortium hopes to take steps to balance the oil market and support prices in reaction to a dramatic demand plunge due to the pandemic. 

Looking forward, oil behemoth and OPEC heavyweight Saudi Arabia is pondering a move to cancel plans to ease up on output cuts. The group will meet in November and Ashford told WSJ a plan to increase production by 2 million barrels a day in January could be delayed.

Signs of hope: Oil contango 

Brent crude future contracts that expire in less than one week are trading for nearly $2 a barrel less compared to similar contracts with an April expiration date, according to WSJ. When the outer-dated contracts trade at a higher price it is known as “contango.”

A contango scenario typically occurs when the market expects an asset price to increase in value over time.