Resurgent pandemic brings new headwinds for the oil market

With India the world’s third-biggest oil market, the economic slowdown driven by the pandemic will hit oil prices.

A slowing Indian economy is a new headwind for oil prices. The country is the world’s third-biggest oil market, importing more than $100bn of the fuel in 2019. Before Covid-19, world oil consumption was around 100 million barrels per day (mbpd). That figure tumbled by 8.7mbpd last year, according to data from the International Energy Agency (IEA). The IEA thinks global demand will recover by 5.7mbpd this year, says Robert Perkins of S&P Global. The agency has raised its forecasts because of strong rebounds in China and the US. 

Oil prices have enjoyed a strong start to 2021, with Brent crude rising by about 27% so far to trade at $66 a barrel this week. That is thanks in large part to supply curbs agreed by the Opec+ cartel of producers, of which Saudi Arabia and Russia are the key members. 

Opec+ has been curbing its output by millions of barrels a day in order to bolster prices. The stronger demand outlook had enabled the group to relax output curbs gradually, says Julian Lee on Bloomberg. The group had been planning to add an extra 2.14mbpd to global markets by July. 

Now India could put a spanner in the works. With the streets of New Delhi and Mumbai falling “eerily quiet” once more, local diesel and petrol consumption looks poised to fall by as much as 20% month-on-month. Japan, the world’s fourth-biggest oil importer, has also declared a state of emergency in the face of rising Covid-19 cases.  

 Mobility data shows that the recovery in oil demand is “uneven”, say Martijn Rats and Amy Sergeant in a Morgan Stanley note. Strength in the US, the UK and Israel is offset by weakness in Europe, India and Brazil. Nevertheless, the investment bank still thinks that oil demand will pick up over the summer. Brent crude looks likely to trade in the $65-$70 a barrel range until the end of the year.

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