Locked in a tussle between slackened demand and supply shortages, oil prices have exhibited a sinusoidal trend over the past few days, rendering future price projections hazy for the black gold. The impact of opposing forces has led to rapid shifts in the price trajectory of crude prices. 

Kunal Sawhney: Entrepreneur with revolutionary ideas; financial professional with wealth of knowledge in Equities, aiming to transform the delivery of equity research through tech-driven digital platformsInitially backed by expectations of rising future demand, oil prices are seen to be under substantial pressure in recent days. Oil prices recently marked their longest losing streak since February 2020 as increasing virus cases worldwide fuelled fears over slower demand for fuel. A surprise build in the American gasoline inventories in the week to Aug 13 also ignited concerns over decelerating fuel demand, putting pressure on oil prices.

The recent downtrend in oil prices started with the Biden administration’s plea with OPEC and its allies to simmer down oil prices by increasing production and providing some respite to the subsequently caused inflationary pressures. However, oil prices initially recovered from this pullback after OPEC+ members uncovered their intentions of keeping oil production intact as per their set plan for the coming months. The Biden government’s botched attempt to bargain with OPEC made the largest oil consumer appear vulnerable to rising oil prices.

But surging COVID-19 cases across the globe have further complicated the scenario, putting downward pressure on the oil prices while hitting the demand outlook.

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Weak demand in the Asia-Pacific region

China, being one of the biggest consumers of oil in the world, has significantly dropped its oil intake following the rapid spread of the Delta variant in the country. The daily crude processing for China plummeted to its lowest level since May 2020 in July this year. The significant drop in numbers was fueled by the implementation of tighter quotas, along with rising inventories and reducing profits.

Moreover, the Delta variant wave has not been friendly to the Chinese economy as the country’s retail sales and factory output data showed a significant slowdown in July. One can say that China’s battle with the new variant has disrupted the country’s businesses while overturning its economy from the position of recovery.

A similar trend is being observed in other countries across the globe. The Delta variant has successfully wreaked havoc in Japan, where a spike in cases has taken a massive toll on the healthcare system, putting outdoor activity at a standstill. Even in New Zealand, a strict lockdown has been imposed after the first COVID case emerged in the country in six months.

All in all, the growing spread of the Delta variant has sparked concerns of weakening global demand, which has been driving oil price movement over recent days. However, a group of analysts still believes that the demand-supply balance will continue to tighten in the coming months at a time when OECD commercial crude oil stocks have already plunged to pre-coronavirus levels.

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What lies ahead for the oil market?

Be it for its feasibility as a cheaper alternative to sustainable energy generation or its high linkage to the US dollar, crude oil has remained an important resource for the US for years. However, the recent drop in global fuel demand appears to have trumped the substantially high Western demand for the liquid, causing an ultimate decline in prices.

In the coming months, the US’ current demand for increased oil production might become a topic of heated discussion when measured against the country’s global commitments towards climate change. The country’s call has already flagged concerns about the viability of its climate change measures and proven the dependence of one of the largest economies in the world on crude oil.

In terms of oil demand, a bearish projection has been recently shared by International Energy Agency (IEA) where it expects demand to remain subdued in the coming months. Coupled with OPEC’s latest stance to keep supply unchanged, the scenario makes for a unique predicament where oil prices see uncertainty looming ahead. However, only time will tell if the global recovery from the Delta variant would revive commodity prices or slackened demand will continue to pull the breaks on oil prices for the long haul.