Oil prices fell Monday as the market priced in worries over the spread of the Covid-19 pandemic and some lack of confidence over OPEC+ maintaining output restrictions.
The excitement in oil prices that led Brent close to reaching $78 per barrel has all but dissipated as the OPEC+ discord takes a back seat to market worries over the resurgence of Covid-19 cases globally and the impact on oil demand in the near term.
The softening of the prompt backwardation in both the Brent and WTI futures curve is a reflection of the market’s unease of making a big bet on OPEC+ again saving the day and keeping the oil market in balance
Traders are now refocusing on the spread of the Covid-19 pandemic and global concerns over the new variants’ expansion are weighing on prices, despite tightening oil supplies globally.
Infections are on the rise in several countries around the world and if restrictions need to be added or reinstated again, they could have an impact on economic growth, and consequently on oil consumption.
The latest wake-up call that the pandemic is not yet behind us came from the G20 over the weekend, as officials pointed out speed bumps in vaccination campaigns that allow the pandemic to spread, threatening the global economic and oil recovery.
The ongoing deadlock in OPEC+ negotiations over the alliance’s output from August, although bullish at first glance, has now sowed enough confusion and discord that the market doesn’t fully trust the alliance to maintain a steady oil price gains path.
There is concern that the ongoing disagreement on a way forward by OPEC+ could lead to the rebellion of some members and to unrestricted output that could flood the market with more oil than it can absorb.
The prospect of unrestricted oil output by OPEC+ producers, in conjunction with what could be a new pandemic wave, is a bearish scenario that has kept a reasonable cap on price gains and helped cut down on frothy speculation.
The Delta variant continues to spread and trigger restrictions in particular in Asia. Our real-time data has captured a drop of 40% in domestic aviation activity in China versus April 2021 levels. Malaysia is still under a full lockdown, which has sent the road traffic index down to 52%.
In the past few weeks and months, the market has been increasingly overconfident that it will be faced with a supply deficit, a scenario that may not materialize with Brent at $75 per barrel, a price incentive for producers to itch to produce much more oil, especially if OPEC+ production lacks regulation.
The OPEC+ group has a total spare capacity of 6.7 million bpd, which can be brought online within 3-4 months. Rystad Energy predicts a 4-5 million bpd rise in oil demand by the end of the year.