When the rollout of COVID-19 vaccines began late last year, the world heaved a sigh of relief that there would be some respite from the ills of the pandemic and an opportunity for economies to rebound. For Nigeria, a country with oil as its mainstay, it was important that oil prices became bullish again.
In the same stride, a few weeks ago, the organisation of the Petroleum Exporting Countries + (OPEC +), fuelled by an optimistic outlook on the market as a result of rising vaccination rates, did an about-face from its pandemic production cuts and made an adjustment allowing members to supply an additional 400,000 barrels per day until September 2022.
However, with the uncertainties around the new Delta strain of the COVID-19 virus detected in India last year- and more recently, the Delta Plus mutation, many are left wondering if OPEC’s optimism came a tad too early. The rising rate of the Delta strain in various countries including the world’s top 3 crude oil importers, the US, China and India, has led to slight price drops on WTI and Brent Crude. There are concerns that lockdowns may be re-imposed and the prices may plunge deeper.
In the last few weeks, analysts have oscillated from predicting no movement in crude oil prices due to appreciable vaccination levels, to uncertainty due to the OPEC+ stalemate between UAE and Saudi Arabia in early July, to anticipating oil price haircuts due to the quick spread of the Delta strain. In determining how the strain will impact crude oil prices, one must consider the severity of the strain, the efficacy of vaccines against it, the rate of vaccination in countries where the strain is found, and the possibility of re-imposing travel restrictions and lockdowns.
While Goldman Sachs recently published an article dousing any fear for waning crude oil prices, with the Delta strain now regarded as the most dominant and most transmissible COVID-19 strain – having spread to at least 124 countries – the Wall Street company may just have spoken too quickly.
The World Health Organisation (WHO) has warned that based on the estimated transmission advantage of the Delta variant “it is expected that it will rapidly outcompete other variants and become the dominant circulating lineage over the coming months.” Dr Mike Ryan, the executive director of the WHO Health Emergencies Program also said the strain is “faster and fitter, and it will pick off the more vulnerable more efficiently than previous variants.” Benjamin Cowling, an epidemiologist at the University of Hong Kong involved in a study on the Delta strain said, “Putting it all together, Delta’s really difficult to stop” One report has shown that vaccines may be slightly less effective against the Delta strain and a consortium of Indian labs have identified one of the characteristics of the Delta Plus mutation – which is already in 11 countries including the US, China and India – to be a possible resistance to vaccines or to immunity gained through previous infection.
For Nigeria whose largest buyer of crude is India, the narrative is bleak. India has already reported a 9-month low in crude oil demand due to COVID-19. As of July 28 2021, the country had reported more than 31.2 million COVID positive cases, with 43,654 new cases and 640 deaths on that day alone. With over 400 million people left to vaccinate, India is not just facing one of the biggest threats with the Delta strain and the Delta Plus mutation, it is also faced with one of the largest vaccination drives globally.
Countries like Thailand, Vietnam, Bangladesh and Algeria are imposing citywide curfews, while Germany is discussing stricter restrictions for the unvaccinated population. There are also lockdowns in certain States in India with more to be expected, while new mobility restrictions have been introduced in parts of Japan, South Korea and Vietnam. To make it worse, China’s economic rebound is reported to have slowed. The US is also beginning to reintroduce restrictions and has raised the travel warning for Spain to the highest level.
According to Avtar Sandu, senior commodities manager at Phillips Futures, a US futures clearing company, “New COVID-19 cases have been rising in Asia for a few weeks now, but sentiment in the oil market is starting to deteriorate as infections rise in the heavy energy-consuming countries of the west.”
While optimism might have lingered when the Delta variant was largely localised to Asia, the quick spread to the countries of the Global North will be a game-changer. In the US, the Delta variant now makes up 83% of all sequenced cases, up from 50% last week.
There is little doubt that the Delta variant will turn the tides downwards for oil prices, especially with the rapid spread and the challenging characteristics this variant presents. While we may not see pre-vaccine levels of lockdowns or crude oil price crashes, prices are certain to respond negatively to this new wave of the virus, especially with the new restrictions being put in place.