Oil Image Credit: Reuters

New York: Oil prices tumbled more than $3 a barrel on Thursday, fuelled by renewed concerns about demand destruction as new cases of coronavirus tick up globally, while crude inventories hit a record in the United States.

US coronavirus cases surpassed 2 million on Wednesday, according to a Reuters tally, and new infections are rising slightly after five weeks of declines. While most states have loosened restrictions on movement that shackled demand, fuel consumption remains 20 per cent below typical levels, as consumers remain cautious.

The US Federal Reserve has expressed concern that this will continue, limiting demand.

"A series of local spikes could have the effect of undermining people's confidence in travelling, in restaurants, entertainment," Fed Chair Jerome Powell said on Wednesday.

"The market is pricing in the possibility that we'll have to slow down a little and that won't bode well for energy demand going forward," said Phil Flynn, senior analyst at Price Futures Group in Chicago.

Brent crude futures fell $3.41, or 8.2%, to $38.32 a barrel by 12:38 p.m. EDT (1638 GMT). U.S. West Texas Intermediate (WTI) crude fell $3.70, or 9.3%, to $35.90 a barrel. Brent and WTI were set for their worst daily drops since April 21 and 27, respectively.

The weakness extended to other asset classes. Equity markets dropped, with the S&P 500 Index down 4% on the day, while U.S.

Treasury bonds rallied.

Crude futures have rallied in recent weeks as government-imposed lockdowns eased, prompting optimism that fuel demand would recover. In parts of Asia and Europe, where the lockdowns were more severe, demand has recovered more sharply.

The Fed said US unemployment was set to reach 9.3 per cent at the end of 2020 and it would take years to fall back, while interest rates were expected to stay near zero at least through next year.

If demand does not recover, U.S. refiners and shippers will find themselves with further excess supply. U.S. crude inventories rose unexpectedly by 5.7 million barrels last week to a record 538.1 million barrels, largely built on Gulf Coast imports from Saudi Arabia, government data showed on Wednesday.

US gasoline stockpiles also grew more than expected to 258.7 million barrels. Distillate inventories, which include diesel and heating oil, rose by 1.6 million barrels, although the increase was smaller than in previous weeks.

Traders also noted weak compliance with the deal reached by the Organization of the Petroleum Exporting Countries, Russia and other producers, a group known as OPEC+, to cut about 10% of global supply. That deal was extended through July over the weekend.

Some OPEC+ countries, including Iraq and Nigeria, have not complied with a supply cut pact by the group. Nigeria exceeded its quota for production cuts under the deal by a little less than 100,000 barrels per day (bpd) in May, the head of the Nigerian National Petroleum Corporation Mele Kyari said on Wednesday.