Oil Prices Falling Due To Concerns Over Spread Of Delta Covid Variant

by Bhaswati Guha Majumder - Aug 10, 2021 12:26 PM +05:30 IST
Oil Prices Falling Due To Concerns Over Spread Of Delta Covid VariantOil tanks.
Snapshot
  • While investors have begun to worry that the Delta variant may have a negative impact on the global economy, traders will be looking for clues about the strength of demand in the monthly oil market reports.

The Delta variant of the novel coronavirus has been detected in more than 100 countries, threatening not only public health but also the economy. On 9 August, oil prices fell below $70 a barrel, adding to the previous week's severe losses due to rising concerns about the mutated version of the virus sapping demand in Asia.

Brent, the leading global crude oil benchmark, fell as much as 4 per cent to $67.87 a barrel, extending a 7 per cent slide from the previous week. The United Stated oil benchmark, West Texas Intermediate, was also down more than 4 per cent to $65.33 a barrel. It fell more than 7 per cent last week, the largest loss in nine months.

China, which is the world's largest oil importer, is now facing a challenging situation due to the current surge in Covid-19 cases. Chinese authorities said on 8 August that they had finished testing all the residents of Wuhan, which has more than 11 million population, for the disease. Beijing has also tightened travel restrictions to contain the spread of the virus.

As reported by Financial Times, Stephen Brennock, an analyst at PVM, an oil brokerage, said: “This flurry of tough epidemic controls has dented the country’s fuel demand outlook. What is more, as well as being under a Covid cloud, China’s oil consumption is also under China pressure from signs of a cooling economy.”

According to ING, China's crude oil imports remained sluggish in July, at 9.7 million barrels per day, down from 9.8 million b/d in June and much lower than the same month a year ago, when they hit 12.1 million b/d. Crude oil imports are down 5.6 per cent year on year in 2021.

High oil prices, limited import quotas, particularly for private refiners and refinery maintenance have all impacted crude oil consumption in China, said Wenyu Yao, who is a senior commodities strategist at ING. She also noted that typhoon In-Fa disrupted port operations on the east coast at the end of July this year which appears to have dragged on crude oil imports for the month.

Meanwhile, as new limits on transportation were imposed because of mounting cases, Chinese air traffic decreased the most since the beginning of the pandemic. Vikas Dwivedi, Oil & Gas Economist at Macquarie Capital said: “Chinese mobility on roads and air traffic is down, so what traders are wondering now is whether or not other large oil-consuming and producing regions will start to see a China-like demobilisation."

Additionally, he said that “we could see this domino effect, where other regions follow China’s lead and that would lead to lower oil demand for the remainder of this year and beyond”.

The oil market has been impacted by a rising US dollar, which makes petroleum more expensive for holders of foreign currencies. Last week, traders evaluated expectations for early withdrawal of the United States’ central bank's economic stimulus after stronger-than-expected American jobs data spurred a rise in the US currency.

However, the report by Financial Times claims that some analysts believe the Delta variant's threats to oil demand are exaggerated, and oil market fundamentals remain solid.

“Economic growth is still on track and forecasts are still predicting robust demand growth over the remainder of the year. All the while, a cautious Opec is still at the helm of the supply side of the oil equation” said PVM’s Brennock while referring to the Saudi-led cartel of major oil producers.

Following the release of stronger-than-expected American job data on 6 August, gold prices tumbled as much as 4 per cent during Asian hours on the first day of this week. Due to rising bond yields and a stronger dollar, the price of gold has dropped 8 per cent this year, reducing the appeal of gold, which has traditionally been regarded as a safe haven asset.

However, investors have begun to worry that the Delta variant may have a serious negative impact on the global economy as governments restore coronavirus curbs and continue to limit international travel. Traders will be looking for clues about the strength of demand in the monthly oil market reports from the International Energy Agency and OPEC, which are expected this week.

According to latest reports, apart from China, the delta variant is spreading rapidly around the world, including in Europe and the United States, where the seven-day average of cases was 110,360 on 8 August, up from 56,987 two weeks earlier.

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