The worst of COVID-19 may be over, but it's still a factor in the price of oil

The worst of COVID-19 may be over, but it's still a factor in the price of oil
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It used to be that a Middle East crisis was the greatest uncertainty to future oil prices. But we have survived a few troublesome incidents in the Gulf recently without much effect. Instead, COVID-19, and particularly the Delta variant first discovered in India, has emerged as a major question mark.

On Monday, the U.S. raised its travel warning for the Gulf state of the United Arab Emirates (UAE) to its highest level — “do not travel”  — because of concerns about coronavirus locally. The UAE’s oil-producing neighbors are probably similarly affected, although they may not admit it. Such developments will have little or no impact on oil production but are an unwelcome reminder of the fact that the coronavirus problem is far from over.

The issue will likely dominate thinking at the virtual meeting on July 1 of the OPEC+ group of oil-producers, a fragile coalition of OPEC members such as Saudi Arabia, Iran and the UAE, and non-OPEC exporters including Russia and Kazakhstan.

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Early predictions of what the meeting may decide suggest that the impact of COVID-19 is being downplayed. Reuters reported Tuesday that OPEC Secretary-General Mohammed Barkindo of Nigeria expected demand to grow by a whopping 6 million barrels per day this year, mainly in the latter six months, although he conceded the possibility of increased infections of the Delta variant was a “wild card.”

In the logic of oil exporters, such likely demand growth necessitates a production increase so that prices can rise, but not so much that customers cut back on their level of purchases. What makes this time around interesting is that American shale oil, our national savior in the past few years, is not predicted to increase by much. Shale companies have been scarred by poor financial results and have become cautious about turning on extra taps too quickly. The current prices of more than $70 per barrel — roughly double what they were last fall — suit these enterprises, and their shareholders, well.

With pandemic restrictions mostly lifted, the American driving public seems to be so glad to get back on the roads that the current high fuel prices are merely an irritant, rather than an obstacle. Perhaps they have also gotten used to prices falling back as well, and so are hopeful that the future is not too distant also.

The Federal Reserve sees such prices as adding to inflationary pressures but, for the moment, the Biden administration seems less concerned. Some parts of Wall Street see $100 per barrel in prospect. Although not unimaginable, oil traders have a vested interest in allowing such speculation to become a conversation point.

The more likely impact will be geopolitical. Higher oil prices benefit adversaries such as Russia, currently playing military games in the eastern Mediterranean, and, of course, Iran. A reversion to a nuclear deal with Tehran is still far from certain, but allowing the ayatollahs to export oil freely at high prices is unlikely to be accompanied by what the West regards as proper international behavior. Even a no-deal outcome is not good from a U.S. perspective, because Iran still would earn more for its exports to China, Venezuela, Syria and elsewhere.

The Biden administration probably has a preference for prices going down, at least a bit, and our adversaries not being strengthened. But the most likely way that may happen could be for COVID-19 to worsen.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.