Oil troubled by virus concerns
15 August 2021
What does the chart show?
The chart shows the Brent Crude oil price since December 2020. The price has dropped sharply in August, falling below $70 per barrel under demand side pressures following rising concerns about the Delta coronavirus variant which has led to a weakening of demand in Asia.
Since the beginning of August, the price of Brent Crude has dropped by more than 9% as China, one of the world’s largest oil consumers, tightened travel restrictions to fight its worst outbreak of the virus since the start of the pandemic.
An additional headwind has been the stronger US dollar, making crude more expensive for holders of other currencies. Stronger than expected US jobs data sparked a rally in the currency last week as investors reassessed expectations for the early tapering of monetary stimulus by the Federal Reserve.
Why is this important?
Firstly, the recent falls must be put in context. The oil price is still up over 60% year to date at the time of writing. Second, all other things equal, we would expect to see oil demand improve again over the next few months if China successfully controls the spread of the virus, something of course it did successfully in the early stages of the pandemic.
Forecasts are still predicting robust demand growth over the remainder of the year. Another reason for the recent weakness was the decision by OPEC to ramp up production by 400,000 barrels per day from August to continue until it has reversed all of the production cuts announced during the pandemic. If future increases in demand outpace the restoration of oil production, this should be supportive of the oil price going forwards.
Source: Bloomberg Finance L.P., Momentum Global Investment Management
Research Date: August 2021
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