Oil prices are down by over 1% towards the start of the London session after the International Energy Agency (IEA) warned that demand growth for crude and its products have declined sharply as surging COVID-19 cases worldwide may force governments to head back to imposing lockdown restrictions.
Brent crude futures, the global benchmark for oil is down 1.11%, currently trading $70.50 a barrel and the U.S. crude is down 1.14%, currently trading at $68.30 a barrel, as of the time of writing this report. The benchmarks however are still heading for a slight gain this week at current prices.
The IEA stated on Thursday that the increasing demand for crude came to a halt in July and is set to rise at a slower pace for the remainder of the year because of the surge in infections from the Delta variant of the COVID-19 virus.
The IEA stated, “Growth for the second half of 2021 has been downgraded more sharply, as new COVID-19 restrictions imposed in several major oil-consuming countries, particularly in Asia, look set to reduce mobility and oil use.”
Due to the rise in COVID-19 cases, Goldman Sachs has reduced its estimate for global oil deficit to 1 million bpd from 2.3 million bpd in the short term as demand is set to decline in August and September. Looking beyond the Delta headwind, the bank still expects the demand recovery to continue alongside rising vaccination rates.
However, the Organization of Petroleum Exporting Countries and its allies (OPEC+) yesterday stuck to its forecasts for a rebound in oil demand globally this year and further growth in 2022, despite the rising concern about the surge in COVID-19 infections.
The OPEC+ in its monthly report raised its expectations for supplies next year from other producers, including U.S. shale drillers, which could potentially hamper efforts by the group and its allies to achieve a balance in the market.
What they are saying
JPMorgan Commodities Research stated, “We now see the global demand recovery stalling this month with oil demand only reaching 98.3 million barrels per day (bpd) in August and averaging 97.9 million bpd in September, on par with the nearly 98 million bpd average in July.”
Caroline Bain, chief commodities economist at Capital Economics, said in a note that, “Although OPEC left its demand forecast unchanged, we think that the near-term demand outlook has deteriorated, which may mean that the group adjusts down its supply plans at its next meeting.”
Although oil prices seem to be struggling, they have posted astronomical growth Year-to-Date (YtD). The brent crude futures has posted approximately 40% gain YtD while the West Texas Intermediate (WTI), the benchmark for the U.S oil has posted approximately 44% gain YtD.
Investors are advised to adhere to caution as a continued rise in COVID-19 cases could mean a lower demand for oil and that will ultimately mean a bearish move for the oil benchmarks.