Oil prices are down by over 2% at the start of the London session, extending last week’s steep losses on the back of a rising U.S. dollar and concerns that new pandemic restrictions in Asia, especially China, may set back the global recovery in fuel demand.
The global benchmark for oil, the Brent crude futures is down by 2.29%, currently trading below the $70 trading zone to currently stand at $69.11 a barrel, after dropping 6% last week, its biggest weekly loss in nine months. The U.S. West Texas Intermediate (WTI) crude futures is also down by 2.40%, currently trading at $66.64 a barrel, after dropping nearly 7% last week in their steepest weekly decline also in nine months.
China reported 125 new COVID-19 cases, up from 96 a day earlier. In Malaysia and Thailand, infections continue to hit daily records of more than 20,000.
As a result of the COVID-19 Delta variant, there have been new restrictions in China, the world’s second-largest oil consumer. These restrictions include flight cancellations, warnings by 46 cities against travel, and limits on public transport and taxi services in 144 of the worst-hit areas.
China’s crude oil imports data released over the weekend revealed a decline on a daily basis in July to 9.71 million barrels per day (bpd), a fourth month in a row of imports below 10 million bpd and sharply down on a record 12.94 million bpd in June 2020 when refiners were stocking up on cheap crude.
China’s export growth slowed more than expected in July following outbreaks of COVID-19 cases and floods, while import growth was also weaker than expected, pointing to a slowdown in the country’s industrial sector in the second half of the year.
What they are saying
RBC analyst Gordon Ramsay said in a note that, “Concerns about potential global oil demand erosion have resurfaced with the acceleration of the Delta variant infection rate.”
ANZ analysts pointed to new restrictions in China as a major factor clouding the outlook for demand growth. They stated, “While the number of cases (in China) is low, it comes just as the summer travel season peaks. This has overshadowed signs of strong demand elsewhere.”
Bottomline
Another reason for the decline in oil prices is the rally in the U.S. dollar index to a four-month high against the euro. This weighed on oil prices after Friday’s bullish U.S. jobs report in the form of Non-Farm Payroll report incited wagers that the Federal Reserve may move more quickly to tighten U.S. monetary policy. A stronger U.S. dollar makes oil more expensive for holders of other currencies.
