Oil drops to lowest since May on demand concerns amid Delta spread and market jitters

Concerns about dampening demand expectations as a result of increase in global coronavirus cases contributed to the drop, analysts say

Oil prices fell for the seventh consecutive day on Friday, hitting their lowest levels since May, on demand concerns as the Covid-19 Delta variant continues to spread and US markets ended their worst week since June.

Crude prices were also weighed down by the US dollar, which strengthened on expectations that the US Federal Reserve will start tapering its stimulus this year.

Brent, the international benchmark, fell 1.91 per cent to $65.18 a barrel at the close of trading on Friday, dropping 8 per cent for the week. West Texas Intermediate, which tracks US crude grades, ended 2.14 per cent lower at $62.14 a barrel, losing about 9 per cent or the week.

This is the longest losing streak for Brent since February 2018 and October 2019 for WTI, according to Bloomberg data.

The major factor weighing on oil prices “is the rising Covid worries and news of measures being taken to avoid a further contagion worldwide”, Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said.

“Even the latest drawback in the US inventories couldn’t give a smile to the oil bulls, while the US inventories declined more than 3 million barrels last week, more than twice as much as the 1.5 million barrels pencilled in by analysts.”

The Dow Jones Industrial Average, S&P 500 and Nasdaq ended in positive territory at the close of trade on Friday, however, all three indexes registered weekly losses after a sharp midweek sell-off, marking their worst week since June, Reuters reported.

For the week, the Dow registered a loss of 1.11 per cent, the Nasdaq dropped 0.73 per cent and the S&P was down 0.59 per cent.

“For now, the hawkish readjustments to the Fed policy boosts volatility in stock prices as the market is about to lose its main catalyser of gains: the cheap liquidity,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said.

“The Fed support was the major driver behind the impressive post-pandemic rally, the end of the support could be the end of it.”

Coronavirus infections are continuing to climb around the world, stoking fears of a decline in oil demand. The spread of the highly contagious Delta variant in countries with low vaccination rates is driving transmission of Covid-19, the World Health Organisation said.

New Zealand on Friday extended a national Covid-19 lockdown as case numbers continued to rise and a Delta variant outbreak spread from Auckland to the capital Wellington. Prime minister Jacinda Ardern said the initial three-day lockdown, which would have expired overnight on Friday, would be extended by another four days.

In Vietnam, authorities are deploying troops in Ho Chi Minh City prohibiting residents from leaving their homes, it was reported on Friday.

Mexico, Iran and a number of other countries are also reporting a higher number of Covid-19 cases despite vaccination programmes. Globally, cases have surpassed more than 210 million, according to Worldometer, which tracks the pandemic.

“Concerns about dampening demand expectations as a result of an increase in coronavirus cases worldwide have contributed to the drop,” Naeem Aslam, chief market analyst at AvaTrade, said.

The International Energy Agency (IEA) has also cut its demand forecast for oil for the rest of 2021 due to the more virulent Delta strain, which may lead to renewed lockdowns in certain parts of the world and affect energy consumption.

Demand for the second half of the year has been lowered by more than 500,000 barrels per day from last month's projection.

Global oil demand is now expected to rise 5.3 million barrels per day on average to 96.2 million bpd in 2021, and a further 3.2 million bpd in 2022, the Paris-based agency said on August 12.

Opec+, the group headed by Saudi Arabia and Russia, is bringing 400,000 barrels per day of supply back to markets in August. The group is planning to phase out a 5.4 million bpd supply restriction pact on the basis of growing demand for crude.

The latest declines follows the release of the minutes of Fed’s July meeting, which indicated a roll back of the US central bank's quantitative easing policy that has been in place since the onset of the pandemic to support the economy.

“The rise in the dollar index following the release of the Federal Open Market Committee (FOMC) meeting minutes has added to the downside pressure.”

The US Dollar Index rallied upwards to 0.1 per cent, its highest mark since April.

As crude oil is priced in dollars, oil prices move opposite to the dollar index, Mr Aslam said. So, when the US dollar appreciates in value, oil becomes more expensive for international buyers. This pushes oil prices down with the appreciation of the US dollar, he added.

Ms Ozkardeskaya said the Fed move is adding to uncertainty in the market.

Even the latest drawback in the US inventories couldn’t give a smile to the oil bulls, while the US inventories declined more than 3 million barrels last week, more than twice as much as the 1.5 million barrels penciled in by analysts
Ipek Ozkardeskaya, senior analyst at Swissquote

“Worsening Covid news, soft economic data and deteriorating sentiment could convince the Fed members that removing support prematurely, as would say Jerome Powell, is not a good idea.”

Market uncertainty, the strong US dollar and surge in coronavirus cases globally, are all contributing to concerns that the global economic recovery might have temporarily peaked and dented oil demand, Tamas Varga, an analyst at London-based PVM Oil Associates told The National.

Elsewhere in the commodities markets, copper, considered the most critical metal for global economies, also dropped 1.15 per cent to $9,043 a tonne at the end of trading on August 20. Iron ore futures fell more than 10 per cent on concerns of slowing steel production in China.

Updated: August 21st 2021, 12:33 PM