(Bloomberg) — Oil declined amid expectations of an upcoming supply increase from OPEC+ producers at a time when the delta variant is threatening a recovery in demand.
Futures in New York fell as much as 1.9% on Monday, the biggest intraday drop in more than a week. The Organization of Petroleum Exporting Countries and its allies will meet Thursday, when they may decide to boost output by 500,000 to 1 million barrels per day in August, according to a RBC Capital Markets report. Meanwhile, the spread of the delta variant is resulting in renewed lockdowns across parts of Asia and Australia.
“Prices appear to be approaching Goldilocks levels for the OPEC+ power players,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, in the report.
U.S. crude futures are still up more than 10% so far this month with progress in Covid-19 vaccination campaigns and reopenings underpinning an ongoing global demand rebound. Whether it’s in the North Sea, the Cushing storage hub in Oklahoma, or the Middle East, futures and swaps in the world’s leading pricing locations are trading deep in a pattern called backwardation, showing how traders are willing to pay big premiums to secure physical barrels.
Saudi Arabia has maintained discipline toward relinquishing supply back into the market, while producers like Russia have considered backing an increase. The 23-nation alliance has restored roughly 40% of the almost 10 million barrels of daily production it shuttered when demand collapsed last year.
With the spread of the variant, “we believe OPEC+ should take an even more cautious approach, only raising production by 100,000 to 200,000 barrels per day, month-on-month in August,” said Louise Dickson, oil markets analyst at Rystad Energy, in a note.
In a further complication to talks on an Iranian nuclear deal, U.S. forces conducted air strikes Sunday against Iran-backed militias blamed for attacking American facilities in Iraq, the Defense Department said. The raids were a “necessary, appropriate and deliberate action” to limit the risk of escalation, said Secretary of State Antony Blinken on Monday.
Meanwhile, exports at a key Norwegian oil field were set to rise to a record, weighing on key benchmark crude timespreads on Monday.
Cases of the delta variant have surged across Europe and Asia in recent weeks, leading to new travel and movement restrictions. The U.K. on Monday reported the most new Covid-19 cases since January, and Hong Kong, Spain and Portugal all imposed new restrictions to visitors from the U.K. At the same time, authorities are racing to contain outbreaks in Australia, where the country’s prior success in curbing community transmission and a slow vaccine rollout is proving vulnerable to the highly contagious strain.
“It just seems to be a much bigger, much bigger variable,” said Phil Streible, chief market strategist at Blue Line Futures LLC.
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