Oil prices have finally buckled after coronavirus cases surged in all the major oil-consuming regions, pushing back the anticipated easing of quarantines and resumption of international passenger aviation.
The number of new coronavirus cases confirmed each day around the world has almost doubled to 84 per million people this week, up from just 46 in late June, according to official statistics compiled by Our World in Data.
North America has seen the number of new confirmed cases soar to almost 300 per million per day up from just 40, while in Europe numbers have surged to 170 from 50, and in Asia to 60 from 30.
Most of the main consuming countries are now in the grip of the third or fourth wave of infections since the start of the pandemic or are fighting to contain local outbreaks.
In response, many governments have re-imposed some social-distancing restrictions, and deferred the planned easing of quarantines and travel bans, while businesses have postponed planned return to central offices.
If COVID-19 behaves like other respiratory diseases, it will spread faster in the Northern Hemisphere autumn and winter, when education resumes, social mixing increases and more activity moves indoors.
With incomplete vaccination programs and poor control of transmission, most governments are unlikely to remove remaining travel restrictions in the next few months.
As a result, the anticipated widespread resumption of long-haul passenger aviation expected in the second half of 2021 has now been pushed back closer to the end of the year or into 2022.
Reflecting this, share prices for major long-haul airlines such as United Airlines, American Airlines and International Airlines Group (owner of British Airways and Iberia) have been sliding since early June.
Yields on short and medium-term U.S. Treasury securities have also been falling over the same period as investors anticipate the lingering impact of the epidemic on parts of the service sector.
The oil market proved resilient for a while, but front-month Brent futures and calendar spreads peaked in early July and have been under gradual but consistent downward pressure since then.
Front-month futures prices, which had risen by more than 11% in the two months to July 5 (a change in the 77th percentile for all similar periods since 1993), have now fallen by 6% over the two months to Aug. 18 (24th percentile).
Brent’s six-month calendar spread has softened from a backwardation of $4.58 per barrel (98th percentile) to $2.50 (82nd percentile), implying traders expect a smaller drawdown in global oil inventories.
Until governments are comfortable enough with the transmission rate to ease international flying restrictions, oil prices are likely to remain capped.