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.

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2 street signs with winner and loser COVID recovery oil price

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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!

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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.

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