The year 2020 – a game-changer year is almost behind us, and as we continue to watch the unfolding of the ripple effect the pandemic created, new issues constantly keep emerging and disrupting the slow progression of the much needed global recovery. The sudden economic halt, worldwide lockdowns, strict curfews, governmentally issued restrictions made it hard to function and get used to the fact that there’s a virus on the loose, that’s potentially dangerous and hard to contain. With the ongoing battle of big pharmaceutical companies to create a high-efficiency vaccine, the world awaits to come back to normal after almost a year of constant stress and pressure. The vaccine might save the world, but as new difficulties appear, coming back to normal might not be so close after all.
The latest issue with the coronavirus is the new strain that appeared in the UK that seems to be restarting talks about new lockdowns and travel restrictions. As the pressure is on for the oil market to recover from the lower demands as a direct result of the pandemic havoc, a hope of a vaccine seems to be thinning as this new coronavirus strain suggests new drops in oil demand. So, is this new virus strain potentially dangerous for the stability of the oil market and what should be expected in the coming months regarding the vaccine and market recovery? Here’s what we know so far.
Oil prices plummeted on Monday by nearly 3% after this new virus strain shut down a majority of Britain; this led countries across Europe and beyond to bar travel to and from the UK in order to contain the spread of this new, fast-moving variant of the coronavirus. The international benchmark for Brent crude oil dropped by 2,6% to $50,91 a barrel and futures of West Texas Intermediate fell by 2,8% to $47,74 for a barrel. These declines were one of the sharpest ones since November 6th and prompted a possibility of a new hit after the news of a new strain broke and numerous countries banned travelers from the UK. The UK government reports that this new strain spreads 70% faster than other known discovered mutations which imposed restrictions in some parts of the country, including London.
Shares in other major oil companies in Europe also dropped on Monday; BP PLC fell by 4,9%, Total SE declined by 3,7% and Royal Dutch Shell fell by 5%. The news of a vaccine and an upward movement in the Chinese economy prompted optimism in the past couple of weeks. Brent for example, reached its highest price since March. These gains occurred even after the warning from the International Energy Agency that several months will be needed before mass vaccinations restart the global oil demand. Some estimates suggest that the recovery of the global oil market might be slower than expected and that it might take up to two or three years to recover. The aforementioned travel restrictions set to last through the course of the next couple of weeks might complicate OPEC+ plans to raise its output step by step. A stronger dollar also made commodities less appealing for investors. Abu Dhabi’s Murban was sold last week below its official pricing and the same pattern was noticed with Russian ESPO and Urals.
Nevertheless, money managers continue to give optimistic forecasts for the oil market – that being backed by speculations of a more constructive outlook for 2021. A lot of speculative money is placed in the oil market, but if this new strain of the virus continues to spread, new travel restrictions might halt the recovery of the oil market and continue to relinquish oil prices and oil demand. If this mutation doesn’t get contained in the proper manner, it’s least likely that these predictions will come true and then we might see more price drops further down the line. Ultimately, it all comes down to appropriate management of this new issue that’s just one of the many bumps in the road to recovery. Even if the vaccine is distributed soon, the process of vaccination will most definitely take some time, so all we can do now is sit back, wait and assess the impact this new situation has had on the economy, and thus the oil market as well.