Fears of new coronavirus variant weigh on oil prices
Brent prices averaged at $42 per barrel in November 2020, while in November 2021 at $83 per barrel, an increase of $41 a barrel. It indicates recovery in market fundamentals and demand. However, the price of a barrel of crude fell to $74 due to fears of new variants of the coronavirus reported in different parts of the world.
Cases of the new variant are spreading in South Africa at a faster pace than the earlier beta and delta strains of the virus.
The new variant initially called B11529 was first reported in South Africa. This strain contains numerous mutations not present in the previously identified strains. Health officials have confirmed 22 cases of the new variant in South Africa and they also believe the variant to be responsible for as many as 90 percent of the cases in Gauteng, the province where the virus was first reported.
The variant possesses around 30 mutations, about twice that of the delta variant. Mutations are particularly problematic because they can reduce the efficacy of current vaccines as demonstrated by the delta variant. More troubling is the transmissibility of the new variant. Cases have also been detected far abroad, namely in Hong Kong and Botswana.
Prices remained under pressure as the market weighed the impact of the surging COVID-19 case in Europe and the US, and a new strain of the virus has raised concerns about the outlook for oil demand.
Meanwhile, investors are still assessing the impact of the coordinated crude release from the strategic petroleum reserves (SPRs) in major oil-consuming countries. The volume of the US-led coordinated release of SPRs is relatively small and is aimed at easing tightness in supply, rather than having a big impact on oil markets.
A stronger US dollar and an Energy Information Administration’s report showing a rise in US crude stocks last week also weighed on prices. Although rising COVID-19 infection rates in Europe point to a softer mobility scenario, mobility indicators in other regions, in general, remain robust, signaling a sustained transport fuel market.
Going forward, refinery intakes should continue to trend upward in response to product tightness in the near term, while seasonality and the implementation of lockdowns could weigh on refinery run rates and may eventually suppress refinery margins and consequently intakes once fuel stocks are replenished.
Refinery margins last week declined in all main trading hubs. The downturn came in response to a continued rise in product output as refineries ramp up run rates following major turnarounds to replenish product stock levels. Seasonal demand-side weakness mainly on clean products and renewed lockdown measures in Europe also weighed on margins.
We believe that prices will likely recover next week in a correction move, though the market will be awaiting OPEC+ meetings next week.
European mobility is expected to fall further as several European countries, including Austria and Germany, are introducing mobility restrictions amid surging COVID-19 cases.
While global shipping conditions have improved recently, challenges remain as the year-end holiday shopping season approaches, and conditions in warehousing and land transportation show no easing as well.
Furthermore, China’s New Year consumer demand is forecast to contribute to the ongoing global excess demand for consumer goods.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.