Rystad Energy: Oil Under Pressure as European Lockdowns Threaten Demand
The collateral damage on oil prices from last week is set to unwind further this week as Germany joins the chorus on calling for tighten restrictions while Europe grapples with a fourth wave of Covid-19 cases.
If a new wave of lockdowns are enacted in Europe, oil prices will not be spared during the remainder of the flu season in the North Hemisphere.
Austria’s decision to impose a new lockdown and the prospect of Germany following suit weighed on prices last week, which proves that Covid-19’s resurgence still has an impact on the market, with some demand being fragile.
The consideration by many heavyweight oil consumers to release strategic reserves is also adding a cloud of extra supply in traders’ notebooks, a possibility that is also priced in by markets, trimming prices from the yearly maximums achieved just a few weeks ago.
While a release of strategic petroleum reserves could certainly put a dampen on oil prices in the short term, eventually these volumes will need to be replaced, so any blow delivered to the short-term price structure would be compensated for in a buying spree down the line.
As Europe, and in particular Eastern Europe, struggles to halt the spread of Covid-19, the risk of lockdown-like measures looms large.
Already, the expected November 2021 oil demand for road and aviation fuels in Europe is down to 7.8 million bpd versus 8.1 million bpd in October, which can also be partly attributed to November being a shoulder demand season.
Gasoline demand in Europe reached a peak during the July 2021 travel season, and since declined about 12%. Jet fuel demand in Europe saw positive growth through the end of October, but has since dropped about 7%.
The seasonal demand decline is not only present in Europe, but on a global scale, where we have seen global traffic levels drop 0.5% since last week across all regions except for Australia, which is still exhibiting a summer boost after extended lockdowns.
Given our present market assumptions, total liquids demand is expected to increase above 99 million bpd in December 2021, but we see downwards risk as the Covid-19 situation could derail trajectories.
If lockdowns are again enacted, the effect could potentially wipe away the demand boost expected for the travel season, and instead exhibit protracted weakness into the spring shoulder season, when we are currently expecting a supply surplus to materialize as early as February 2022.
What the market will now be focusing on is mostly the gravity of the pandemic’s next wave. With supply set to trickle back at an incremental pace, the market turns back to demand signals for the next impetus.
With the market back taking cues from demand, any new restrictions have downward implications for oil consumption, and will be perceived as bearish for trading.
The decision to re-lockdown countries is not taken lightly, given the political unpopularity it carries, but as hospitals are again overwhelmed with cases, governments are taking drastic measures that imply very real downside risk for not only oil demand, but economic recovery.
