Oil Ends Lower Friday On Demand Concerns From Delta Variant Spread

Oil Ends Lower Friday On Demand Concerns From Delta Variant Spread
The Covid-19 delta variant continued to dampen the global demand outlook as the week closed with lower oil prices on Friday while edging a modest 0.2% gain for the week.

Oil dipped, trimming a weekly advance, as the fast-spreading delta variant continues to cloud the short-term demand outlook.

Futures closed nearly 1% lower on Friday in New York, narrowing a weekly gain to 0.2%. The latest Covid-19 wave is leading to tighter curbs on movement across the globe, though there are mixed assessments on its impact. The International Energy Agency reduced its demand forecasts for the rest of the year, while Goldman Sachs Group Inc. predicts only a transient hit to consumption.

“The news surrounding delta is a bit worse than we expected, and the short-term view is becoming increasingly concerning as cases rise,” says Jay Hatfield, portfolio manager at AMCP, the InfraCap MLP exchange-traded fund. “Long-term indicators are still relatively bullish on oil, but for the near future, the delta variant and its hit to demand isn’t looking like it will burn itself out.”

Delta has interrupted a rally that pushed oil prices more than 50% higher in the first half of the year as major economies such as the U.S. began moving again. A critical concern is the flare-up in China, where authorities have taken an aggressive approach to containing the outbreak. While the overall number of cases in the country are still in the hundreds, the spread of the variant to more than 17 provinces is raising international concerns about China’s near-term mobility.

Prices

  • West Texas Intermediate for September delivery fell 65 cents to settle at $68.44 a barrel on the New York Mercantile Exchange.
  • Brent for October dropped 72 cents to end the session at $70.59 a barrel on the ICE Futures Europe exchange.

The oil market’s structure has also weakened. Brent’s prompt timespread narrowed to 39 cents in backwardation -- a bullish signal where near-dated contracts are more expensive than later ones. That compares with 92 cents at the end of July.

Global oil demand “abruptly reversed course” last month, falling slightly after surging by 3.8 million barrels a day in June, the IEA said in its monthly market report on Thursday. The drop in consumption comes as OPEC+ hikes output with a goal to steadily revive all of the production halted during the pandemic.

“The market’s been relatively stagnant, and that’s because the reports released this week show conflicting perspectives on exactly where demand is going to go,” said Thomas Finlon, director of Energy Analytics Group LLC. “Investors are on high alert for an update to delta and until we get that clarity, investor sentiment is essentially in limbo.”

--With assistance from Grant Smith and Elizabeth Low.  © 2021 Bloomberg L.P.



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