Second wave could spell disaster for oil prices

While the oil shocks of April now seem a distant memory, there is mounting evidence that a second wave of Covid-19 could send prices spinning into a nosedive once more, upending markets reliant on energy such as the Middle East and the US.

The virus has sickened more than 14 million people globally, and has now been reported in nearly every country. 

On Monday, US oil prices edged lower towards $40 a barrel, as infections spiked in Los Angeles and Hong Kong.

“The second wave has begun,” William Schaffner of the Vanderbilt University School of Medicine told CNBC.

The bad news undercuts what has been a solid two months of optimism in oil markets, with prices rebounding as lockdown measures in Europe and Asia were slowly lifted.

But because of this optimism, “an unexpected dip of any magnitude will send the oil price into a tailspin, whether swift and sharp, or long and painful”, according to energy consultancy Rystad.

So what is a second wave likely to look like, and how will it affect oil prices?

The idea of a second wave, in which the spread of the virus is curbed before returning several months later in a powerful way, is somewhat unique to Europe.

“If you look at global infection rates, they haven’t peaked at all – they’re continuing to go up,” says Colin Smith, head of oil research at Panmure Gordon. “The second wave concept is quite Europe-centric, it reflects our experience.”

Meanwhile, the virus is now sweeping through oil-consuming countries such as Brazil, India, South Africa, and the US, with the death toll rapidly increasing. More than 600,000 people have died globally.

More broadly, analysts say, is the issue of repeat lockdowns and disruptions to production in countries that are under assault from the virus, including Saudi Arabia, Iraq, and the US – three of the world’s largest oil exporters.

Because of the more localised nature of these lockdowns, in which the authorities will impose restrictions on cities, rather than entire countries, the impact is not likely to match the severity that was seen earlier this year.

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