The Covid-19 Delta variant could dampen global demand for oil and threaten natural gas activity in the United States if the rapid spread of the virus continues into the fall.
In the United States, the total number of cases and hospitalizations remains below the peaks reached last winter before the generalization of vaccination campaigns. However, reported infections are on the rise in August across the country, and Americans hospitalized with severe coronavirus cases are increasing in states with below-average inoculation rates.
In the first two weeks of August, the average number of new hospitalizations in the United States rose nearly 60% since the start of the month, according to Johns Hopkins University analyzes of state and federal data. Louisiana and Florida have had record hospitalization rates this month, as the rapidly spreading Delta variant primarily afflicts unvaccinated residents, who are on average younger and sicker than those infected in 2020, the reporters reported. two states.
Similar challenges hampered swathes of Europe and Asia this summer, prompting forecasters to lower expectations for oil demand. Concerns about possible disruptions in natural gas demand also surfaced this month.
On the crude front, for the week ended Aug. 13, aggregate domestic demand rose 10% week / week, the US Energy Information Administration (EIA) said in its latest weekly condition report. petrol. Gasoline consumption, however, fell from recent 2021 highs to 9.3 million b / d last week, down 97,000 b / d from the previous week and 200,000 b / d. j below the average level of the previous six weeks. Analysts at ClearView Energy Partners LLC said the drop could indicate the increase in the number of cases “is having a negative impact on demand.”
A University of Michigan survey of U.S. consumer confidence fell 13.5% in the first half of August compared to July, among the largest declines since the index was created in 1978 Larger drops in the index only occurred during the shutdown of the economy in April 2020 (-19.4%) and at the height of the Great Recession of October 2008 (-18.1%). ).
Citing the proliferation of the Delta variant, University of Michigan economist Richard Curtin called it a “staggering loss of confidence” that spanned income, age, education and geographic subgroups. . “Consumers have rightly reasoned that the performance of the economy will be diminished over the next few months, but the extraordinary increase in negative economic assessments also reflects an emotional response, mainly due to disappointed hopes that the pandemic would end soon.” , Curtin said.
The pessimism, he said, is rooted in fears that state governments will impose new trade restrictions to tackle the virus, potentially cutting spending and travel – the latter impacting demand for the virus. ‘gasoline and jet fuel derived from petroleum. Already, for example, California will require proof of vaccination or a negative virus test to attend large indoor events, and several counties across the state have reinstated indoor masking requirements for everyone.
More and more employers are also starting to require employees to show proof of vaccination. In the energy sector, Chevron Corp. confirmed to the Wall Street newspaper Monday that it demands that expatriate employees and workers traveling abroad get vaccinated. Some US onshore and offshore workers in the Gulf of Mexico will need to be vaccinated by November.
Decrease in demand
Retail sales, which include in-store and online purchases, fell 1.1% last month from June, according to the US Department of Commerce.
Globally, similar trends are emerging and oil forecasters are taking note. The International Energy Agency (IEA) said last week that it expects global oil consumption to rise 5.3 million bpd this year from depressed 2020 levels and an average of 96.2 million bpd. The latest forecast for 2021, however, was down from the July IEA estimate of 5.4 million bpd. The Paris-based agency cited the increase in virus cases and the easing of economic activity brought about by the rapidly spreading Delta variant.
The Organization of the Petroleum Exporting Countries (OPEC) maintained its forecast level of demand in a report this month, saying demand for oil will increase by 5.95 million bpd this year, or nearly 7%. . However, the cartel has focused on emerging pandemic threats that could change its outlook. “The trajectory of the COVID-19 pandemic will be the primary factor impacting the pace of recovery in the short term,” with “the potential emergence of new variants and / or mutations posing particular risk,” said the ‘OPEC.
Brent crude prices rose more than 30% in 2021, in part due to a rise earlier in the week. But the international oil benchmark is down about 10% in August, after collapsing for several days last week.
Although bolstered by strong weather-related demand for much of this summer amid heat waves, analysts say the experience of early 2020, when the pandemic took hold, suggests that gas prices natural gas could also come under pressure from a sustained coronavirus surge, particularly if one U.S. LNG destinations impose lasting lockdowns.
China reported nearly 900 cases of the virus in the first two weeks of August, more than double the total for all of July, according to the country’s state media. The Chinese government now enforces strict stay-at-home policies in outbreak areas and restricts travel between most provinces and suspends flights in some areas. This decreased the demand for fuel, according to Rystad Energy.
“Rapid restrictions in China are causing a complete collapse of domestic aviation, which has lost the momentum of its recovery and is now almost back to the lows of the first wave of the pandemic,” said Simen Eliassen, analyst at Rystad Energy .
China’s transport ministry has also ordered all crews working in the country’s ports to have vaccination certificates or negative tests before they can load or unload cargo, a development that could hamper the pace of exports and imports. to the world’s second-largest economy – including US LNG shipments. China is the largest consumer of US LNG.
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The last time such restrictions were imposed, in the spring and summer of 2020, “the impact on the LNG trade was severe,” said Galia Fazeliyanova, energy economics analyst at the Country Forum. gas exporters.
âAlthough the overall LNG market has been much more robust compared to the oil market during the pandemic, the volatility of traded volumes has increased significantly,â Fazeliyanova added.
The potential for strict lockdowns in the United States appears low, for now, given the lack of appetite for a 2020 repeat. But if virus cases continue to rise until the fall, the analyst at Jefferies Christopher Wood said the Delta variant would present a “major risk”. “
More employers could delay plans to return to the office, and Americans wary of the variant could choose to avoid the crowds and cut spending. Apple Inc., for example, said last week it has postponed returning to work until at least early 2022. Such delays could hamper commercial consumption of natural gas.
Delta’s impact “on the psychology of Americans is in terms of the sudden realization that life is not completely returning to normal,” Wood said.
US natural gas futures are up about 60% from the year that started in August. But thanks to trading last week, futures contracts this month are down more than 2%.
Vaccination rates in the United States peaked in April of this year and, although rising this month, remain below half of last spring’s highs, according to the United States Centers for Disease Control and Prevention. .
The energy industry, however, is hoping that further vaccination efforts will minimize Delta’s economic impact.
The Food and Drug Administration said on Monday that the vaccine developed by Pfizer Inc. and its partner BioNTech SE had received full approval, marking the first to get an unconditional green light from the government. The vaccines had been approved urgently. The hope now is that the approved vaccine, for people 16 years of age and older, will inspire more people to get vaccinated. More employers can now require vaccination as well.
Already, the US military plans to impose vaccination on all military after the approval of the Pfizer vaccine by the FDA, according to the Pentagon.
The Texas Independent Producers and Royalty Owners Association (TIPRO) said Monday that upstream employment in Texas for July 2021 was 175,100, an increase of 1,500 jobs from June and the third consecutive month of growth. . But the trend may soon be halted.
The Delta variant “will impact the pace of recovery in the near term, including job growth in oil and gas in Texas, but data suggests vaccinations, natural immunity and caution audience will help keep the latest variant at bay and avoid the major economic problems we have experienced before, âsaid TIPRO President Ed Longanecker.
“We continue to anticipate a strong recovery in global oil demand this year and further growth in 2022,” he added. However, “leading US producers will maintain a very disciplined approach to their production goals and we can expect OPEC to do the same in its efforts to achieve and maintain a balance between supply and demand. world “.