- Aneeka Gupta, Director, Research, WisdomTree Europe
Why have declines accelerated in recent weeks?
Oil price declines have been accelerated by concerns about the spread of the Delta variant in China its impact on oil demand. China being the second largest oil consumer and the largest oil importer plays a dominant role in the oil market. These concerns were fuelled by July activity data published overnight in China by the National Bureau of Statistics (NBS) which fell short of expectations across the board. Industrial production grew by 6.4% (1 National Bureau of Statistics (NBS)) year-on-year (yoy), marking the lowest rate of growth in a year. Fixed asset investment excluding rural growth slowed to 10.3%1 yoy in July, from 12.6%1 in June, below the consensus 11.3%1 which also highlights lack of governmental support. Retail sales also pulled back significantly to 8.5%1 yoy in July from 12.1%1 in June below the consensus 10.9%1.
Last week both the International Energy Agency (IEA) and Organisation of the Petroleum Exporting Countries (OPEC) painted less optimistic outlook on the oil market in the monthly reports. The IEA lowered its demand forecast for the second half of 2021 by a considerable 600,000 (2 International Energy Agency (IEA)) barrels per day. The oil market would then only remain slightly undersupplied if OPEC+ kept its oil production below target. The IEA expects a sizeable surplus next year if OPEC+ sticks to its plans and fully reverses its production cuts. The monthly OPEC report shared a similar view to the IEA, that next year’s call on OPEC will be 1 million barrels per day lower than previously envisaged. This is due to noticeably higher non-OPEC supply in particular from Russia. According to the IEA, oil stocks in industrialised countries in June were 66mn barrels below the pre-pandemic five-year average.
Another trigger for last week’s oil price slide was driven by headlines from the White House calling on OPEC+ to increase production to cool elevated oil prices.
What can we expect from oil in the second half of the year?
Oil prices appear to be struggling owing to the short-term impacts from the spread of the new variants of COVID-19. We expect oil prices to trade in a volatile range owing to the uncertainty stemming from the spread of the Delta variant in various parts of the globe. That being said the oil market is currently in a deficit. There is a ray of hope emerging from India, the world’s third largest oil importer, where fuel demand increased to a 16.8mn (3 Reuters) tons in July, a 3-month high after declining to a 9-month low owing to the coronavirus restrictions. Now that infections have abated and restrictions lifted in India, fuel demand in India is garnering momentum. This could also be the case in several parts of Asia as they re-emerge from the stringent containment measures currently in place. Investors currently appear to be overpricing the risk of a decline in demand and underestimating the possibility of geopolitical risks. We expect oil prices to end higher by year end.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
Why have declines accelerated in recent weeks?
Oil price declines have been accelerated by concerns about the spread of the Delta variant in China its impact on oil demand. China being the second largest oil consumer and the largest oil importer plays a dominant role in the oil market. These concerns were fuelled by July activity data published overnight in China by the National Bureau of Statistics (NBS) which fell short of expectations across the board. Industrial production grew by 6.4% (1 National Bureau of Statistics (NBS)) year-on-year (yoy), marking the lowest rate of growth in a year. Fixed asset investment excluding rural growth slowed to 10.3%1 yoy in July, from 12.6%1 in June, below the consensus 11.3%1 which also highlights lack of governmental support. Retail sales also pulled back significantly to 8.5%1 yoy in July from 12.1%1 in June below the consensus 10.9%1.
Last week both the International Energy Agency (IEA) and Organisation of the Petroleum Exporting Countries (OPEC) painted less optimistic outlook on the oil market in the monthly reports. The IEA lowered its demand forecast for the second half of 2021 by a considerable 600,000 (2 International Energy Agency (IEA)) barrels per day. The oil market would then only remain slightly undersupplied if OPEC+ kept its oil production below target. The IEA expects a sizeable surplus next year if OPEC+ sticks to its plans and fully reverses its production cuts. The monthly OPEC report shared a similar view to the IEA, that next year’s call on OPEC will be 1 million barrels per day lower than previously envisaged. This is due to noticeably higher non-OPEC supply in particular from Russia. According to the IEA, oil stocks in industrialised countries in June were 66mn barrels below the pre-pandemic five-year average.
Another trigger for last week’s oil price slide was driven by headlines from the White House calling on OPEC+ to increase production to cool elevated oil prices.
What can we expect from oil in the second half of the year?
Oil prices appear to be struggling owing to the short-term impacts from the spread of the new variants of COVID-19. We expect oil prices to trade in a volatile range owing to the uncertainty stemming from the spread of the Delta variant in various parts of the globe. That being said the oil market is currently in a deficit. There is a ray of hope emerging from India, the world’s third largest oil importer, where fuel demand increased to a 16.8mn (3 Reuters) tons in July, a 3-month high after declining to a 9-month low owing to the coronavirus restrictions. Now that infections have abated and restrictions lifted in India, fuel demand in India is garnering momentum. This could also be the case in several parts of Asia as they re-emerge from the stringent containment measures currently in place. Investors currently appear to be overpricing the risk of a decline in demand and underestimating the possibility of geopolitical risks. We expect oil prices to end higher by year end.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
