General view of the Imperial Oil refinery in Canada (Reuters File Photo)
General view of the Imperial Oil refinery in Canada (Reuters File Photo)

Oil drops toward $62 on concern resurgent virus will sap demand

Oil’s value has risen more than a quarter this year as vaccines are rolled out, paving the way for a relaxation of lockdowns, greater economic activity, and increased mobility.
Bloomberg |
PUBLISHED ON APR 21, 2021 06:44 AM IST

Oil fell amid concern a resurgent virus will hurt demand in some economies, and after data showed a slight build in US inventories.

West Texas Intermediate was 0.5% lower in early Asian trading following a drop of more than 1% on Tuesday, when crude joined a broad-based retreat in equities and other commodities. The renewed spread of Covid-19 in countries such as India is casting a pall over the global economic rebound, even as signs of an improvement in energy demand elsewhere continue to pile up.

Oil’s value has risen more than a quarter this year as vaccines are rolled out, paving the way for a relaxation of lockdowns, greater economic activity, and increased mobility. Against that backdrop, the Organization of Petroleum Exporting Countries and its allies plan to start easing deep supply cuts from May. But the dramatic flare-up in cases in India has started to undermine the narrative that there’ll be an uninterrupted rebound in global consumption.

The American Petroleum Institute reported domestic crude stockpiles rose by 436,000 barrels last week, while gasoline supplies fell by more than 1.6 million barrels, according to people familiar with the data. If confirmed by US government data on Wednesday, that would be the first weekly increase in crude inventories in four weeks.

In India, soaring new cases have forced both the financial and political capitals to impose restrictions on movement, with New Delhi mandating a six-day strict lockdown that started Tuesday. The nation is now the world’s second-worst hit country, lagging only the US, with daily infections topping 200,000.

In Japan, Tokyo and Osaka -- the two biggest and economically important cities -- will ask the government to declare a state of emergency to contain a surge in cases just three months before the start of the delayed Olympics.

Still, there are optimistic forecasts. Vitol Group, the biggest independent oil trader, expects demand to come roaring back as the world emerges from the pandemic, and predicts a rally to $70 to $75 a barrel in the third quarter.

There are also positive signs in China, Asia’s largest economy. Traffic and factory activity across the world’s biggest crude importer is surpassing pre-virus levels. Among data points, congestion during morning rush hours in cities including Beijing and Shanghai was higher than average 2019 levels in the week to April 12, according to figures from TomTom International BV.

Brent’s prompt timespread remains backwardated at 65 cents a barrel, up from 40 cents at the start of the month. That’s a bullish pattern, with near-term prices trading above those further out.

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