Oil fell after a three-day rebound as a number of funds shifted away from near-term contracts, fearing a repeat of the meltdown last month that saw prices plunge below zero. Futures fell 8% toward $18 a barrel in New York as investors worried that a massive supply overhang while the coronavirus shatters demand will send the market tumbling again.
The manager of a $500 million oil exchange-traded fund in Hong Kong said its broker refused to let it increase holdings of crude futures. S&P Global Inc., which is behind the most closely followed commodity index, said it will roll West Texas Intermediate futures for July into August, while the United States Oil Fund LP said it will halve holdings in the July contract. Last week, crude rallied almost 50% in three days on early signs of improving consumption and the start of output curbs from OPEC+ and other producers.
While there are signals the plunge in demand might have bottomed out in some markets, traders believe it’s likely to take more than a year and perhaps longer to return to pre-coronavirus levels.
Even with fuel use recovering, the market will still need to digest the extra inventory dumped by the Organization of Petroleum Exporting Countries last month. OPEC production surged by the most in almost 30 years in April as members waged a price war, and kept supplies high even after reaching a cease-fire in the middle of the month.
“The market is having a bit of a reality check this morning,” said Ole Sloth Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “The fundamental outlook has improved, with supply cuts meeting a pick-up in demand. But given the risk that the global economic outlook will continue to deteriorate, it is much too soon to begin speculating about a recovery.”