Has The Oil Market Learned To Live With Covid?

After a few uncertain months, as OPEC oil cuts continued and Covid restrictions came back into place, oil demand for 2021 finally seems stable, with price and demand increases set to continue.  As the Delta variant became more prominent in July, initially in India and the U.K. and then gradually across the rest of the globe, many countries were forced back into lockdown or experienced other restrictions to work and movement. This led several experts to speculate that oil and gas demand would inevitably be driven down once again in the face of global restrictions limiting travel and industry. However, as the U.K. reduced all restrictions in mid-July, and several other countries continue to ease lockdowns, this anticipated dip in demand did not hit the industry as hard as expected.  

Brent crude posted a fourth monthly gain in July, as oil demand grew faster than supply thanks to a successful vaccine rollout and the increase in work and travel activities worldwide. As vaccine efforts in North America and Europe continue, international air and local road travel trends are finally picking up, sending demand for petroleum products soaring. 

While American oil firms have kept production in check through the course of the pandemic, this trend is likely to change as demand continues to rise. Rob Haworth, senior investment strategist at U.S. Bank Wealth Management stated, “It’s a matter of when, not if, before we see more of a supply response in the U.S.”

In addition, after months of steep output cuts, OPEC+ production reached a 15-month high in July, pumping an average of 26.72 million bpd as Saudi Arabia agreed to ease cuts in line with global demand. 

Carsten Fritsch of Commerzbank explained an important shift in the demand trend in relation to the coronavirus, which could mean the two are no longer inextricably linked. "Most forecasts are still predicting robust growth in demand in the second half of the year," as "It is easy to believe that the oil market has learnt to live with the virus, in other words.", he stated. 

Even though some dips are likely to continue around the world, as restrictions come in and out of place, the pandemic no longer seems to be the universal demand killer. 

For example, demand went down for the first time in a year in China this July, causing oil prices to dip as factory activity fell in the country in response to high product prices. In addition, an increase in Covid-19 cases has led China to introduce new pandemic restrictions further adding to the decrease in demand. 

While in India, despite the ongoing challenges of continued Covid-19 cases, oil demand is rising. In fact, at the end of last week, India’s fuel demand peaked as petrol consumption reached pre-pandemic levels in response to easing pandemic restrictions across the country. 

State-owned fuel companies sold 2.37 million tonnes of petroleum in July, a 3.56 percent increase on pre-pandemic sales in July 2019. Diesel sales also increased, by 12.36 percent to 5.45 million tonnes, on 2020.

With Asia driving global oil demand and expected to be the main market over the next decade, China and India have a significant impact on global demand levels. However, with Europe and the U.S. making the statement that they are learning to live with the coronavirus, changes in Asian oil needs are countered with greater stability in long-established markets meaning the increasing oil demand is set to continue through 2021.