End of oil price rally fires warning shot for the ASX COVID recovery trade

The oil price rally appears to have come to an abrupt end in what could be an ominous sign for the COVID-19 reflation trade.

| More on:
2 street signs with winner and loser COVID recovery oil price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The oil price rally appears to have come to an abrupt end in what could be an ominous sign for the COVID-19 reflation trade.

It isn't only the end of JobKeeper that investors have to worry about!

While the Brent crude price bounced around 2% to US$64.53 on Saturday, investors are still feeling the sting of the more than 7% crash the day before.

It's not only shareholders in ASX energy shares like the Woodside Petroleum Limited (ASX: WPL) share price and Oil Search Ltd (ASX: OSH) share price that would be biting their nails.

Oil threatening the ASX recovery trade

Oil is after all the poster child for the COVID recovery trade where the biggest losers for the pandemic were supposed to be the biggest winners in 2021.

Other ASX shares that joined the recovery party include the Qantas Airways Limited (ASX: QAN) share price, Eagers Automotive Ltd (ASX: APE) share price and Flight Centre Travel Group Ltd (ASX: FLT) share price – just to name a few.

These shares have more than doubled over the past year on the belief that COVID's economic impact is fast dissipating.

Will oil's slide sink other ASX COVID-losers?

But could the harsh reality check for the oil market prove to be an early warning for other hotly sort after COVID losers?

After all, questions about the speed of the expected recovery from the pandemic that triggered the sell-off.

Europe is struggling to contain another wave of the virus as their vaccination program seems to have stalled. This means demand for oil is likely to be lower than originally expected, reported the Wall Street Journal.

Lower economic activity in such a large market cannot be good news for the rest of the world.

ASX COVID losers are still winners

While there is good reason to be cautions about expecting more upside from oil-exposed ASX shares, I don't think we should extrapolate the sombre news to other ASX shares.

For one, the lacklustre demand outlook for crude makes the commodity unique. Electric vehicle adoption forecasts by several experts adds to the view that demand for oil peaked before the pandemic. It's unlikely to return to pre-COVID levels.

The major oil producers in the OPEC+ club have done a good job in curtailing supply to buoy prices, but this may not be enough to fire-up crude prices.

Predictions that crude will rebound to US$80 a barrel now looks fanciful, so profit taking in the sector isn't unexpected.

Let's also not forget that lower oil prices are stimulatory to the broader economy.

Foolish takeaway

However, the demand outlook for other ASX "re-inflators" and other commodities look brighter in comparison.

The only caveat I would add is the blistering speed of oil's recovery shares similarities to the rebound of many ASX COVID losers.

As last week showed, this makes the path to recovery an especially winding one to navigate.

Hope you are wearing comfy shoes fellow Fools!

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Businessman smiles with arms outstretched after receiving good news.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a lucrative return to trading for investors this Tuesday.

Read more »

Business man at desk looking out window with his arms behind his head at a view of the city and stock trends overlay.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »

Warren Buffett
Share Market News

$10,000 invested in Berkshire Hathaway shares 5 years ago is now worth…

The past 5 years have been especially fruitful for Berkshire Hathaway investors.

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Coronado Global, Genesis Minerals, Monash IVF, and Platinum shares are sinking today

These shares are starting the week in the red. But why?

Read more »

A man sits in a chair hunched over a laptop and covered head to toe in frozen icicles to represent Envirosuite's trading halt
Mergers & Acquisitions

Johns Lyng Group shares enter trading halt. Is it a takeover target?

This ASX 200 stock looks ripe for a takeover.

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.
Share Gainers

Why Austal, Botanix, DroneShield, and NextDC shares are storming higher today

These shares are starting the week with a bang. But why?

Read more »

A female coal miner wearing a white hardhat and orange high-vis vest holds a lump of coal and smiles as the Whitehaven Coal share price rises today
Share Gainers

The Coronado Global share price just surged to a 114% weekly gain. Here's why

Investors have sent the ASX coal stock flying higher in June. But why?

Read more »

Two brokers pointing and analysing a share price.
Share Market News

Here are the ASX 20, ASX 50, ASX 100, and ASX 200 shares being added and kicked out of their indices

Let's see what changes are being made at this month's quarterly rebalance.

Read more »