ADVERTISEMENT

Oil Declines as Delta Clouds Outlook for Global Demand

Oil dipped -- trimming a modest weekly gain -- as the fast-spreading delta virus variant continued to cloud the demand outlook.

Oil Declines as Delta Clouds Outlook for Global Demand
An employee pours a sample of oil from a bottle into a measuring vessel at a drilling site. (Photographer: Chris Ratcliffe/Bloomberg)

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.”

Oil Declines as Delta Clouds Outlook for Global Demand

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.

Oil Declines as Delta Clouds Outlook for Global Demand

“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.”

Other market news:
  • Just when it looked like U.S. shale explorers were settling in for slower growth the rest of this year, the oil-rig count this week jumped the most in four months. The total number of rigs searching for oil across the country rose by 10 this week to 397, according to Baker Hughes Inc. data released Friday.
  • A key pipeline linking Canada’s oil sands crude to U.S. markets could start shipping crude as early as next month.
  • The U.S. sanctioned an individual and businesses it says are involved in an oil-smuggling network that supports Iran’s Islamic Revolutionary Guard Corps-Qods Force.
  • U.S. consumer sentiment fell in early August to the lowest level in nearly a decade as Americans grew more concerned about the economy’s prospects, inflation and the recent surge in coronavirus cases.

©2021 Bloomberg L.P.