Oil drops on oversupply warnings, rising COVID-19 cases

Oil production in Azerbaijan
Vostok | Getty Images

Oil prices fell on Wednesday after the International Energy Agency and the Organization of the Petroleum Exporting Countries warned of impending oversupply and as COVID-19 cases in Europe increased the downside risks to demand recovery.

The market pared some of those losses after an unexpected decline in U.S. crude oil stockpiles.

Brent crude futures dropped $2.6%, or $2.15, to settle at $80.28 a barrel. U.S. West Texas Intermediate (WTI) crude futures settled 3%, or $2.40, lower at $78.36 per barrel.

U.S. crude oil inventories fell by 2.1 million barrels last week, latest government data showed, running against analyst expectations for a build of 1.4 million barrels. The IEA on Tuesday warned that while the "oil market remains tight by all measures, ... a reprieve from the price rally could be on the horizon ... due to rising oil supplies."

New waves of COVID-19 cases in Europe which drove some governments to reimpose restrictions also weighed on prices.

"The impact has thus far been negligible," oil brokerage PVM's Stephen Brennock said. "That being said, the risk is there for the situation to escalate and mobility levels to be severely undermined in the coming months," he added.

The agency said high price levels will see U.S. oil production rising again in 2022, accounting for about 60% of its forecast of 1.9 million barrels per day for non-OPEC supply growth. Latest weekly data showed U.S. output dipped to 11.4 million bpd, though these figures are rounded off and volatile.

The high cost of fuel prices is a growing concern for the Biden administration, which on Wednesday asked the Federal Trade Commission to investigate the growing gap between the cost of unfinished gas and what consumers are paying at the pump.

The United States has considered an emergency release of oil from the U.S. Strategic Petroleum Reserve, though the SPR is generally used during natural disasters or supply disruptions usually caused by wars.

In the most recent week, the United States released more than 3 million barrels from the SPR, the second consecutive release of this size. These sales from the SPR are part of previously approved sales by Congress, and are not considered emergency releases. However, analysts have said the administration could consider speeding up such approved sales rather than resort to an emergency declaration.

"With the mechanism for this sale already in place, with broad discretion from the legislation on timing, and without the risk of alienating IEA allies, accelerating this 18 mb of mandated sales may be the easiest of the options the White House has," said J.P. Morgan analysts in a Wednesday note.

On Tuesday, OPEC Secretary General Mohammad Barkindo said the group sees signs of an oil supply surplus building from next month adding that its members and allies will have to be "very, very cautious".