Oil prices plunged on Tuesday morning, with the Brent benchmark sliding to $40 a barrel, as the market looks increasingly concerned that oil demand recovery is faltering with the end of the U.S. driving season and weak refining margins in Asia.

As of 9:40 a.m. EDT on Tuesday, WTI Crude was down 6.97 percent at $37.00—the lowest level since the middle of June, and Brent Crude was plummeting 4.50 percent at $40.04, also the lowest price since June.

The difference in performance between the two benchmarks today is due to a Labor Day settlement mismatch, John Hardy, Head of FX Strategy at Saxo Bank, said.

“Rising Covid-19 cases around the world continue to raise concerns about the short-term demand outlook. To the list we can add the end of the US summer driving season, lower Chinese imports and a stronger dollar,” Hardy said, noting that the key support in Brent is now at $40.   

In a sign that demand recovery is faltering, over the weekend, the world’s top oil exporter Saudi Arabia cut its official selling prices for crude oil for October.

“Clearly this suggests that the market is not tightening as quickly as many had anticipated, with supply edging higher, and with demand clearly faltering,” ING strategists Warren Patterson and Wenyu Yao said on Tuesday.

Rystad Energy’s Senior Oil Markets Analyst Paola Rodriguez-Masiu commented on the plunging prices on Tuesday:

“Today’s oil price move is a clear sign that the market now seriously worries about the future of oil demand and not just plays a bearish-bullish daily trading game that sends prices swinging.”

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“The cocktail of more Covid-19 infections and an expected decline in road fuel demand in the US is strong enough to put healthier WTI prices to sleep for a while until the hangover is over,” Rodriguez-Masiu said.

According to the analyst, the widening contango in both WTI and Brent is set to incentivize floating storage again, when traders will charter tankers to store oil to sell at a profit at a later stage. 

By Tsvetana Paraskova for Oilprice.com

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