Oil Prices Fall as 'Virus' Cases Increase in Europe

Oil Prices Fall as ‘Virus’ Cases Increase in Europe

Oil prices fall on Monday on rising coronavirus cases some European Countries raising demand concerns despite Fitch Ratings upward adjustment.

International benchmark Brent crude was trading at $63.68 per barrel early in the morning, falling 1.31% after Friday close at $64.53 a barrel.

American benchmark West Texas Intermediate (WTI) was at $60.61 per barrel at the same time, declined 1.35% after it ended the previous session at $61.44 a barrel.

Monday’s price slump was primarily driven by investor jitters over a possible demand decline as several European countries, including Germany and Belgium, announced plans to increase measures against the rising number of coronavirus cases.

As the coronavirus numbers exceeded a key threshold in Germany, Chancellor Angela Merkel will meet with state officials later on Monday to discuss the necessity of returning to a stricter lockdown.

The weekly number of new cases, which fell rapidly in January and February in the country, started to rise again at the end of February and into March.

The rising cases were believed to be the result of the rapid spread of virus variants.

Belgium’s health minister Frank Vandenbroucke on Sunday voiced the need for additional measures despite the country experiencing its second, tough national lockdown since November.

“We have set ourselves a very important ambition by completely opening schools after Easter and catering from 1 May,” Vandenbroucke said. “With this increase in contamination, there is a risk of not achieving these objectives. It is not impossible. To ensure our goals, additional measures are needed.”

Just recently, Fitch Ratings significantly revised up its 2021 and 2022 oil price predictions to reflect a stronger-than-expected demand recovery and supportive OPEC+ output policies.

The rating agency increased its 2021 price forecast to $58 a barrel from $45 a barrel for Brent and raised WTI oil prices to $55 a barrel from $42 a barrel.

Read Also: Oil Prices Slide on Expectation of Overweight Supply

“This reflects stronger-than-expected oil demand and an economic recovery in 2H20, the fairly small impact of the latest lockdowns and other mobility restrictions, and OPEC+’s supply management, which includes Saudi Arabia’s voluntary cuts of a million barrels a day,” it added, describing the oil major’s supply management policy as “prudent.”

Fitch estimated that oil prices will continue to benefit in the short term from positive sentiment due to successful vaccination rollouts and the upcoming $1.9 trillion stimulus package in the US.

Moderate prices expected in H2-2021

However, Fitch assumed that prices would moderate in the second half of the year and into 2022. It raised its 2022 assumptions by $3 a barrel to $53 a barrel and $50 a barrel for Brent and WTI, respectively.

“We expect OPEC+ to continue actively managing supply, at least in the medium term, and that excess oil inventories will normalize quickly. We kept longer-dated prices unchanged and these continue to incorporate the expected marginal cost of supply, as well as energy transition risks,” it said.

OPEC+ production cuts were the main driving force that helped the market rebalance fairly quickly in the second half of 2020.

Recalled OPEC+ rolled over existing production quotas until April, excluding Kazakhstan and Russia, which were allowed marginal production increases.

Saudi Arabia also decided to keep its voluntary cuts, which Fitch said, “should accelerate inventory normalization and support prices, at least in April.

“Once inventories have been normalized, we expect OPEC+ to adjust its production in line with demand to avoid significant deficits or surpluses, which could result in prices moving into the $50-$60 a barrel range.”

The agency recalled that the International Energy Agency (IEA) expects demand to improve further in the second half of 2021 with the gradual easing of mobility restrictions from vaccination rollouts.

The agency warned, however, that the oil price recovery will not be enough for US shale production to grow at the rates seen before the pandemic due to producers’ increased focus on free cash flow generation, debt reduction, shareholder distributions and consolidation in the sector.

Nonetheless, the agency did not rule out the possibility of a positive US supply response to high prices in the near term.

“While we expect OPEC+ to continue managing supply over the next one or two years, views on how to do so may diverge. Russia has been pushing for production increases and was effectively allocated a marginally higher quota in early 2021,” it said.

The agency said in the long term, agreeing on similar deals may be more challenging.

“Iraq, Kuwait, Russia and the UAE are planning long-term production increases, while many producers’ output, including Saudi Arabia and the UAE, were already well below their capacity before the pandemic,” it said.

However, it warned that the future OPEC+ discussions could be complicated by the energy transition and some countries’ desire to increase production volumes to monetize their oil reserves.

Oil Price Fall as ‘Virus’ Cases Increase in Europe