Oil gives up in face of Delta threat

In the second half of 2020, Asia became a powerhouse of the global economic recovery. Notably, a year later Asia turned out to be the major drag. The reason is obvious – a rapid spread of the Delta COVID strain across the Eastern nations. According to CNPC estimates, this resurgence could erase up to 5% of the global short-term demand for petroleum products. Besides, OPEC and its allies have agreed to scale up oil production rates starting from August. Due to these factors, the sharpest slump in Brent price in August 2 over the last two weeks comes as no surprise.

Back in the early 2020, China managed to tackle pandemic outbreaks. It became the first economy to log GDP growth in the wake of the corona crisis. So, China's economic expansion provided the global economy with a boost. Meanwhile, China's industry, the main driving force of the domestic economy, gained momentum. However, at present this propulsion plant of GDP growth is losing steam. Business activity in China's manufacturing sector contracted to the weakest level in more than a year. Moreover, services PMIs have been also going down for a few months straight. People are scared off by new COVID outbreaks in 14 out of 32 provinces. Though the number of infected people is very small, the Delta strain is highly contagious being prone to affect vast areas. Under such conditions, Beijing has to re-impose economic restrictions. Importantly, in case the virus is contained in the coming few months, economic fallout might last for longer time.

China manufacturing and services PMIs


The situation is much worse in Indonesia, the country known as the major gasoline consumer in Asia. The lockdown there is extended until August 9. Until present, motor fuel imports plummeted by almost a quarter. Evidently, Asia is dragging down both the global economy and demand for crude oil.

At the same time, the US has also nothing to boast about. Daily rates of newly infected people could increase to 100,000 unless those Americans, who have not received coronavirus jabs yet, will continue avoiding vaccination. The authorities in the US again insist on mandatory face masks in public places for those who have received both doses. Such developments make investors fretted. Meanwhile, business activity in the US manufacturing sector is also turning sour. According to the latest survey by the ISM, the US manufacturing PMI dropped to the lowest score since January due to disruptions in delivery chains and the lack of workforce.

Against the backdrop of rising infection rates in Asia and in other parts of the world, the decision of OPEC and its allies to ramp up oil output looks clearly premature. In July, Russia increased its production rates of oil and condensate by 0.3% on month to 10.46 million barrels per day. It means that Russia produced 9.56 million bpd in each of the first summer months, a bit higher than Russia's previous quota of 9.495 million bpd. Citing words of Russia's energy minister Alexander Novak, he assures that Russia is 100% committed to the OPEC+ pact.

To sum up, the Delta variant that is raging across the globe puts a strain on the global energy demand. On the other hand, the alliance of major oil exporters agreed on scaling up their oil output quotas. Under such market conditions, the most feasible scenario is consolidation of Brent prices until new market catalysts pop up.

In terms of technical analysis, a further Brent trend will depend on whether the bulls or bears will grasp control over $73.5 – 74.2, the area of a cluster of emerging averages and pivot points. Long positions will make sense when oil prices trade firmly above 75.16 a barrel.

Brent, daily chart


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