Oil Rally Snaps as Covid Crisis Grips an India in Lockdown

© Reuters.

By Barani Krishnan

Investing.com - India matters, whether OPEC+ likes it or not.

Oil’s three-day rally came to an end on Friday as globally-televised images of an India literally on fire from Covid — with thousands killed from the virus cremated in open spaces — sent a chill across crude markets, which count on demand from the nation of 1.4 billion people. 

States and cities in most parts of India, including capital New Delhi and financial hub Mumbai, went into lockdown and curfew, although a national shutdown had not been called.  India is the world’s third-biggest oil importer, and the restrictions on its economy have raised expectations that Prime Minister Narendra Modi’s government will need to raise more funds for stimulus, with the country already in deficit of an estimated 188 billion rupees ($2.5 billion) just one month into its current fiscal year. 

For days, oil markets have tried to ignore India’s Covid catastrophe, which has logged nearly 18 million infections, or more than half of the U.S. tally of 32 million. Crude prices rose without stop between Tuesday and Thursday on optimism over demand growth for this year projected by producers’ cartel OPEC+ and bullish U.S. oil inventory numbers and economic data.

But on Friday, the rally snapped on news of the growing lockdowns in India, as well as in Brazil, another major emerging market economy for oil. Weak U.S. stock markets added to the negative mood.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, was down $1.67, or 2.6%, to $63.34 per barrel by 12:00 PM ET (16:00 GMT). WTI had hit a six-week high of $65.46 earlier in the week.

London-traded Brent, the global benchmark for crude, fell $1.52, or 2.2%, to $66.53. Brent soared to $68.43 earlier this week.

WTI remained up about 2% on the week while Brent showed a weekly gain of almost 1%, as the gains in recent days were higher than Friday’s slide.

“The Covid crisis in India, the world's third-largest importer of oil, continues to escalate and, in fact, shows no signs of abating,” said Sophie Griffiths, head of research for U.K. and EMEA at online trading platform OANDA.

“With daily cases continuing to reach new records day after day, the peak clearly hasn't been reached yet. With ongoing lockdowns and threats of new variants, the dire Covid situation in India is the dominant headwind risk to oil currently.”

Rystad Energy warned on Wednesday that India’s Covid crisis could slash an extra 575,000 barrels per day of oil liquids demand in April and 915,000 bpd in May 2021, disturbing the almost-balanced global oil market and building a sizable glut.

A joint-technical committee meeting of oil producers from the OPEC+ cartel just concluded on Monday it might be able to clear by the end of the second quarter a year-long glut in oil triggered by the pandemic. 

OPEC+, which held back at least 7 million barrels of daily supply from the market since April 2020, will be pumping more oil from next month. It plans to add 350,000 barrels per day in May and June, and a further 400,000 barrels daily in July.