Crude futures spreads narrow as Yellen says Delta variant a concern
Quantum Commodity Intelligence – Front and second month crude futures spreads have narrowed sharply over the past few days amid fears that rising covid-19 infections will knock off predictions of a strong return to economic growth this year.
Front line and second line Brent and WTI, which were trading at $1/b in backwardation last week, are now closer to just $0.70/b as fears that the so-called Delta variant will hit demand for travel not just in Asia, but also elsewhere.
"The excitement in oil prices that led Brent close to reaching $78 per barrel has all but dissipated as the OPEC+ discord takes a back seat to market worries over the resurgence of Covid-19 cases globally and the impact on oil demand in the near term," said Louise Dickson, an analyst with consultants Rystad Energy.
"Traders are now refocusing on the spread of the Covid-19 pandemic and global concerns over the new variants' expansion are weighing on prices, despite tightening oil supplies globally," she said.
The flattening of the backwardation structure is a sign of nearby weakness of oil demand and comes after a meeting between G20 finance ministers on Saturday where the US Treasury Secretary warned of turbulent economic ctimes.
"We are very concerned about the Delta variant and other variants that could emerge and threaten recovery," US Treasury Secretary Janet Yellen said in Venice after G20 talks among finance ministers at the weekend.
"We are a connected global economy, what happens in any part of the world affects all other countries."
India in April and May was rocked by a brutal third wave that saw more than 400,000 infections recorded a day as the Delta variant first discovered there was evidently more transmissible.
While that has fallen sharply due to regional restrictions that choked fuel demand, cases remain on the rise in southeast Asia.
Delta
Rystad Energy said there was a 40% fall recently in domestic aviation activity in China versus April 2021 levels, while Malaysia's lockdown has sent the road traffic index down to 52%.
The spread is not confined to Asia, with the UK expected to see infections reach 100,000 a day as it fully opens its economy up next week, hoping that rising infections will not lead to rocketing deaths among its population, most of which is already vaccinated.
In Europe, Germany and France warned their citizens against travelling for vacation to Spain, where the governor of the Bank of Spain warned that infections still posed a serious threat to economic recovery.
The European Centre for Disease Prevention and Control said that infections had jumped 30% across the EU and EEA economic zone and expected it to double by the middle of next month.
And in the US, two thirds of all states have recorded a 10% or more increase in cases over the past week with the variant now accounting for more than half of all new cases in the world's biggest economy.
While the majority of the US population is vaccinated, there are concerns that protection offered by the Pfizer vaccine, one of two that accounts for most inoculations in the country, disappears over time, particularly in the vulnerable.
Pfizer officials are due to meet senior White House advisors on Monday to discuss the need for booster jabs.
On Monday, Israel – one of the most vaccinated societies in the world- said it would offer third doses of the vaccine to its vulnerable population over fears that Pfizer's effectiveness wears off in months.
Despite this, oil analysts are bullish, expecting demand growth to continue well into next year.
