NYMEX WTI falls 8% as COVID-19 uptick puts demand recovery in doubt

Crude settled sharply lower June 11 amid concerns that a resurgent COVID-19 pandemic could blunt demand recovery outlooks.

NYMEX July WTI fell $3.26 to $36.34/b and ICE August Brent moved $3.18 lower on the day to $38.55/b.

Reports of rising coronavirus cases in several US states that have reopened their economies fostered concerns that a COVID-19 resurgence could prompt a second wave of stay-at-home measures, derailing oil demand recovery outlooks.

"[The market] was lulled to sleep that some of the volatility has ebbed away in the past weeks," Tradition Energy analyst Gene McGillian said. "Today [it] was hiding just beneath the surface."

Despite the growing demand for oil products in the US, GDP projections raised concerns for oil demand going forward, analysts said.

The US Federal Open Market Committee on June 10 estimated that US GDP could contract 6.5% in 2020, while the Organization for Economic Co-operation and Development said it expects global GDP for 2020 to fall 6%, or 7.6% in the event of a second wave of coronavirus infections.

NYMEX July RBOB settled 9.11 cents lower at $1.1188/gal and July ULSD was down 8.5 cents on the day at $1.088/gal.

US Treasury Secretary Steven Mnuchin rejected the idea of a potential second lockdown in a June 11 CNBC interview.

"We can't shut down the economy again. I think we've learned that if you shut down the economy, you're going to create more damage," Mnuchin said.

US equity markets suffered their worst day since March with the Dow Jones Industrial Average closing down nearly 7% on the day.

Bob McNally, president of the Rapidan Energy Group, said he expects crude prices to remain around current levels through the summer, although "any whiff of another wave of shutdowns in the fall, and all bets are off."

Implied volatility -- a measure of downside risk in the market -- for front-month WTI has steadily declined in recent weeks to around 38% on June 10. The metric was last lower in late February, when COVID-19 was just beginning its global spread.

But downside risk remains significantly elevated. Prior to the pandemic, implied volatility for WTI was last this high in January 2019. Implied volatility data is a day-behind.

Weakened demand prospects could tip the oil market back into an oversupply situation, derailing expectations of the market reaching balance in the coming weeks.

"Following yesterday's downbeat outlook by the Fed, energy traders are worried permanent damage to the economy along with a second wave of the coronavirus will cripple prospects for a strong second half of the year," OANDA senior market analysts Edward Moya said in a morning note.

US commercial crude stocks surged 5.72 million barrels to 538.07 million barrels in the week ended June 5, Energy Information Administration data released June 10 showed. The build pushed stocks to 13.5% above the five-year average and the highest in records dating back to 1982.

"We need to see signs that this overhang in inventories will get eaten away, and today we got a bit of a reminder that demand isn't as robust as people think," McGillian added.

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