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    Oil rises on crude stocks draw expectation, sidelining OPEC+ and COVID concerns

Summary

Oil prices rose today as market expectations for a draw in US crude inventories are sidelining concerns over the future of the OPEC+ deal and the expansion of Delta variant, for now.

by: Louise Dickson, oil markets analyst at Rystad Energy

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Oil rises on crude stocks draw expectation, sidelining OPEC+ and COVID concerns

Oil prices are on the rise today as a result of the anticipation of data confirming a bullish trend of crude inventory draws in the US. They could get further support if the API’s forecasts also match the expectation later today.

News of yet another oil stocks draw will likely have a larger effect on the WTI benchmark, but also a residual upswing to support other benchmarks such as Brent.

As official inventory data will come tomorrow, another confirmed large draw would further prove the recovery of refinery demand in the US, and cement even more the strong price levels, a needed support for bulls as some clouds of uncertainty are ahead.

The market is aware, however, that the blockbuster rebound in oil products demand in the US is not a trend being repeated around the rest of the world, where many countries are still very much in the trenches of getting the Covid-19 virus under control.

Pronounced downward oil pressure is visible in countries that have imposed restrictions in response to the Delta variant, especially in South Korea, Australia, Malaysia, and Indonesia.

South Korea is in the midst of its worst COVID-19 case spike, which has triggered a strict lockdown in the capital city of Seoul to protect the largely unvaccinated population from the fast-spreading Delta variant.

Ahead of the Delta breakout in June, South Korea was nearing 2019 oil demand levels for road and aviation activity, but now the same index is only 84% compared to pre-pandemic levels.

Australia is reacting similarly to the outbreak, with schools and stay-at-home orders in place in Sydney. The demand index for road and aviation has dropped to 71% in the first weeks of July after peaking at nearly 90% in May 2021.

The demand dent is also becoming visible in Japan, which has enacted strict lockdowns ahead of its plan to host the Olympic Games in July and August.

According to our country-level oil demand models, there are still some countries and regions that will not see oil demand levels recover to pre-pandemic levels until 2022, and some are delayed even further out on the timeline.

The Delta outbreaks, past and future, could further delay projected timelines for a recovery to 2019 oil demand levels and are working as speed bumps for some countries that hoped to reach the end of the Covid tunnel by the end of this year.

Another roadblock to economic and oil consumption recovery is the oil price itself. A sustained period of oil prices above $75/barrel is a real burden for oil-importing countries, which have to divert more spending power on expensive but essential commodities instead of reinjecting the cash into other sectors of the economy.

Europe is also taking a cautious approach to the new Delta variant, with many governments admitting social distancing restrictions were lifted too soon and delaying reopening plans.

The Delta variant is the wild card of the bearish deck and could change the oil demand recovery trajectory for many key oil-consuming countries, especially where vaccination rates are not yet at a satisfactory level.

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