Delta variant could fuel oil demand and price declines

The World Bank (2020) notes that the outbreak of the COVID-19 pandemic and the sweeping measures needed to slow its progress triggered an unprecedented collapse in oil demand and a record one-month drop in oil prices. oil in March 2020. Coupled with the collapse in global demand for energy, has been the alarming rate of accumulation of global stocks, which has increased sharply in times of limited storage capacity, as the Agency has found. Energy International (2020).

The relationship between demand and supply, which rocked oil markets and culminated in falling oil prices, was not unexpected as the measures deployed to contain the virus, including quarantines, travel restrictions, the shutdowns of non-essential activities were certainly ripe for economic upheaval. .

The sudden drop in oil consumption in a context of continued sustained production led to a rapid build-up of oil stocks, reducing the remaining storage capacity to a capacity close to capacity in the first half of the year.
In the early parts of the pandemic, oil prices fell dramatically, registering their largest one-month drop on record in March of the same year compared to 2020.

In one case, the spot price of European Brent fell 85% between Jan. 22, when the virus was first detected and reported to have human-to-human transmission, and April 21, according to the World Bank file. These staggering revelations were more than the drop in prices recorded at the height of the global financial crisis of 2008 when prices fell 77% from the end of August to the end of December 2008. They were also greater than the drop recorded during the entire period. end of June 2014 to mid-January 2016, when prices fell by around 77%.

It must be said that during the year 2020, the price of West Texas Intermediate (WTI) oil fell into negative territory on April 20 (World Bank 2020; OilPrice 2020).

Analysts around the world have attributed the drop in prices to the global pandemic and the restrictions on business and personal activities that were imposed as necessary measures to stem the spread triggered the global recession and the sharp decline in demand for oil which resulted.

Recent price increase attributes

Macroeconomic fundamentals attribute the recent rise in the price of oil to stagnant global supply and a relational increase in demand from emerging markets and developing economies (EMDEs) which typically have more energy-intensive production methods than the Cooperation Organization. Economy and Developing Countries (OECD) according to Alquist and Gervais (2013). This fact attributes the growth in demand for oil in developing economies to their general economic growth.

The fall in oil prices in 2020 should not be a wonder because since 1970 the world economy has experienced seven oil price drops when oil prices have fallen by 30% or more over a six month period― 1985-86, 1990-91, 1998, 2001, 2008-2009, 2014-2016 and 2020. During these periods of falling prices, the experiences 1990-91, 1998, 2001, 2008-2009 and 2020 were half entirely demand-driven, the other years being largely supply-driven declines.

The duration of these previous declines in oil prices varied in short spells for those of 1998 and 2001, with oil prices returning to their pre-drop levels in less than four years. In contrast, oil prices plunge around the global recessions of 1990-91, 2008-09, and the largely supply-driven declines of 1985-86 and 2014-16 were followed by prolonged periods of low oil prices.

In 2020, however, the accidental drop in oil prices appeared to have curled up in the face of increased demand when, about a year after the first human-to-human transmission recorded in January 2020, prices began to rebound to levels of d. ‘before the pandemic of over US $ 60 a barrel by February 2021. The following months are expected to see prices rise due to an expected increase in demand as economies rebound.

Hamilton (2009) defines the most important fact for understanding short-term changes in oil prices as income rather than price; the key determinant of the quantity demanded. He shows in his analysis published in the Brookings Papers on Economic Activity, Spring 2009, that despite the huge fluctuations in the relative price of oil from 1949 to 2009, oil consumption followed by income has increased steadily.

In a more nuanced understanding of the events of the present day with the pandemic, Hamilton’s characterization of the demand for oil, which invariably affects prices, reflects the reduction in incomes of many surrounding people, thereby reducing their purchasing power by oil products.

This stagnation is ensured and accentuated by the extension of restrictions on the mobility of people and communities who, under normal circumstances, will need their daily life to maintain the balance of demand in order to avoid a fall in oil prices. as we have seen since the beginning of August.

In most cases, it remains true that low prices are likely to provide, at best, temporary initial support for growth once restrictions on economic activities are lifted and until excess stocks are released (World Bank , 2020). Once the global recovery was underway after the plunge in global growth in 2020 and excess stocks were depleted, oil prices would automatically rise in line with expected global economic growth.

These expectations began to emerge when the year 2021 was ushered in and in the first half of the year many economies around the world experienced some economic growth and a commensurate increase in oil prices reaching nearly US $ 80 per barrel.

The Delta variant

Until recently, global oil price spikes, fueled in part by an increased vaccination rate against the COVI-19 pandemic, boosted confidence in demand markets as economies normalized as people recovered. their usual lives and that the consumption of petroleum products increased.

This hope, however, has been offset by recent records of an increase in infection in many countries due to the presence of a more transmissible variant of the coronavirus, the Delta variant, a highly strain of SARS-CoV-2 virus. contagious, which was first identified. in India in December 2020. It passed quickly through this country and Great Britain before reaching the United States (United States), where it is now the predominant variant.

At the end of July 2021, Delta was the source of more than 80% of new COVID-19 cases in the United States, according to estimates by the Center for Disease Control (CDC). The World Health Organization (WHO), through its technical lead on COVI-19, Dr Maria Van Kerkhove, described the Delta variant as 50 percent more transmissible than the alpha, beta, gamma variants. and the ancestral variant detected in the United Kingdom, South Africa, Japan / Brazil and China Wuhan respectively.

WHO estimates that the variant has already reached around 130 countries with 65 countries as of Thursday, August 5, 2021, reporting an increase in the number of cases.

These outbreaks occur in the United States, the United Kingdom, Africa and Asia. This brought the total number of recorded cases worldwide to over 200 million according to analysis of data from Johns Hopkins Hospital as of August 4, 2021. Despite the relative success of some countries such as Thailand and Vietnam, to contain cases of Covid-19 in the last year, the Delta variant caused a sharp increase in recorded cases.

Oil demand and price concerns

The current development is concerning as it invariably means that the spread of the Delta variant will weigh on the global demand for energy. The surge in the number of virus cases in recent times has caused the prices of the international benchmark Brent Crude to fall, as has the benchmark of the United States (US), the West Texas Intermediate (WTI).

The upsurge in cases has led to several cancellations of flights across Europe, Asia and the Americas, painting a grim picture of the progress made in vaccinations since the start of the year. The Thai government, for example, announced strict restrictions, which would be imposed from August 3 to 16, 2021 in 29 provinces, according to Apisamai Srirangsan, spokesperson for the government COVID-19 task force.

The current decline in demand is also attributed to the imposition of restrictions on movement in many parts of China, made necessary by the increase in cases of the Delta variant. In the case of China, the largest oil importer is of concern because it has the potential to darken the outlook for consumption, a situation that will hamper and depress oil price stability.

The mandatory quarantine measures of July 2021 have already caused several delivery delays and disruptions in the marine fuel market. The Chinese and US aviation industries have also suffered from several flight cancellations blamed on the spread of the virus.

The Delta variant that has spread from the Chinese coastline to cities in the interior is concerning, especially since just a month ago the spread of the variant disrupted industrial activities that depended on supply. and the use of petroleum products.

In the United States, data from the Institute of Supply Management (ISM) revealed that there was a slowdown in US manufacturing plants as they recorded a national plant activity of 59.5 in July, down from the plant’s national activity of 60.6 in June.

Corroborating how these staggering increases in new COVID-19 cases are a cause for concern in oil price volatility, Fankel and Rose (2010) indicate that macroeconomic variables that refer to actual global activities like the pandemic COVID-19 and microeconomic variables like oil stocks in determining commodity prices are crucial in determining oil prices.

In conclusion, the potential to have COVID-19 Delta and recently the Delta-plus variants continue to cause an increase in the spread of the coronavirus in the future will have a devastating effect on the demand for oils and its price.

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