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Oil piles on losses following OPEC+ deal to boost supply, rising COVID cases

CommoditiesJul 19, 2021 03:38PM ET
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© Reuters. FILE PHOTO: A sticker reads crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, U.S. November 22, 2019. REUTERS/Angus Mordant/File Photo

By Laila Kearney

NEW YORK (Reuters) - Oil slumped $5 a barrel on Monday, closing out its worst day since March, after an OPEC+ agreement to boost output stoked fears of a surplus just as rising COVID-19 infections once again threaten demand.

Crude oil's year-long recovery has stalled out over the last two weeks due to the prospect of new supply undermining the case for higher prices. With the Delta variant of the coronavirus spreading worldwide - fuelling a 70% rise in U.S. infections last week - funds bailed out of long positions on Monday across multiple risk asset groups, including stocks and the dollar. (Graphic on U.S. cases) https://graphics.reuters.com/HEALTH-CORONAVIRUS/USA-TRENDS/dgkvlgkrkpb

It is still unclear how the variant will affect oil demand. Consumption in the United States, the world's largest consumer of fuel, has steadily strengthened in recent weeks, but India, the third-biggest importer, has cut back imports due to oversupply and fears of reduced demand.

"The market is very fixated on the potential for the Delta variant exploding," said Phil Flynn, senior analyst at Price Futures Group in Chicago. "Because of that, we're getting a run on the bank."

Brent crude settled at $68.62 a barrel, losing $4.97, or 6.8%. U.S. oil futures for August delivery, which expires on Tuesday, settled at $66.42, down $5.39, or 7.5%. The September U.S. crude oil futures contract settled at $66.35, down $5.21.

The Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, reached a compromise on Sunday to increase oil supply from August to cool prices, which had hit their highest level this month in more than two years.

"We still face a significant deficit in terms of supply versus demand, but for now, the additional barrels are seen as enough to deflate and kill the recent rally," said John Kilduff, a partner at Again Capital in New York.

Given heavier trade volumes - with Brent futures trading 167% of the last session - it appeared funds were selling off, Kilduff said. "It absolutely has the look of a speculative liquidation here."

Some major banks have argued the market will continue to rally, with Goldman Sachs (NYSE:GS) reiterating on Monday that it sees more upside. It said the OPEC agreement was in line with its view that producers "should focus on maintaining a tight physical market all the while guiding for higher future capacity and disincentivising competing investments."

However, the OPEC deal removes more of the supply curbs that have been a cornerstone of the market for a year. At present, OPEC+ is keeping about 5.8 million crude barrels per day out of the market, a figure that will drop by 2 million bpd by year-end.

"Longer term, free and additional production capacities from OPEC+ countries are the key reason why we see oil moving lower again," said Julius Baer analyst Carsten Menke.

A popular spread trade in the oil market - between the first two December futures contracts, December 2021 and December 2022 - narrowed to the smallest since June 1. A narrowing spread indicates that traders expect supplies to rise by the end of 2021.

Oil piles on losses following OPEC+ deal to boost supply, rising COVID cases
 

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Comments (9)
Alan Rice
Alan Rice Jul 19, 2021 1:38PM ET
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(cheaper oil ain't the way folks-"good luck" with that.) tic-toc.
ugur timsah
ugur timsah Jul 19, 2021 11:01AM ET
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every price above $55 is expensive for brent
Meru Pet
Meru Pet Jul 19, 2021 11:01AM ET
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on what criteria? if they don't invest in new oil ressources and in utilities to substitute oil, it is actually cheap
Khan Achakzai
Khan Achakzai Jul 19, 2021 5:17AM ET
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Nothing can keep moving up like a steel rod and oil was doing just that. The price needed a healthy correction and now is the time it should happen. And looks like it is happening.
John Esser
John Esser Jul 18, 2021 10:50PM ET
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NGRD play against short term falling oil
Willaims Graham
Willaims Graham Jul 18, 2021 10:50PM ET
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Have you heard of crypto ultra boost trading ??
Jokers R Us
Jokers R Us Jul 18, 2021 10:42PM ET
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still going to $100
emad hijazi
emad hijazi Jul 18, 2021 10:42PM ET
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yes , long term
Michael Dell
Michael Dell Jul 18, 2021 10:42PM ET
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$200
Albert Chin
Albert Chin Jul 18, 2021 10:35PM ET
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Oil falls cuz Opec cant reach an agreement. Oil falls when opec reaches an agreement….
Barani Krishnan
Barani Krishnan Jul 18, 2021 9:58PM ET
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" 'This agreement should give market participants comfort that the group is not headed for a messy breakup and will not be opening up the production floodgates anytime soon," RBC Capital Markets said in a note.' " The problem with this comment is that it's bullish for oil. Thus no one, for now, has an idea why prices are down 1.5% (WT) when a relief rally should be happening on the back of the OPEC deal. I'm not complaining that the market is down as I'm of the opinion that oil is overpriced anyway. But it's interesting that it dropped. This shows that Covid and other exegenous factors probably have a deeper impact on oil than thought.
Filipe Pereira
Filipe Pereira Jul 18, 2021 9:58PM ET
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Dear Krishnan, problem is that if they Will produce more oil, then oil must become cheaper, because there is no warranty they have demand for such increase oil output.investors need to check Next gasoline and destilates stock reports and oil stock piles report to check supply demand, but blindly now what they know is that Will have more oil, thats the only warranty. actually wti oil price dropped from 77$ until here almost 6$ now in a week or so..it Will not be a surprise if it Touch 66,50$ tomorrow
Barani Krishnan
Barani Krishnan Jul 18, 2021 9:58PM ET
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Filipe Pereira  Thanks for that perspective. I said the same as oil climbed from $40 to $50, then to $60 and finally $75. None listened then. Like drooling chimpanzees throwing darts at stocks, all the longs in oil wanted was to buy and buy and get prices higher and higher. Some apes were even muttering $200 oil; that's how banal it got. Suddenly, everyone had forgotten about the phrase called demand destruction and how that's inevitable beyond a certain price point versus demand. I'd almost given up, thus my expectation for a relief rally today after this relatively light OPEC deal. Well, it looks like some are finally waking up to reality. Let's see if this holds till tomorrow's European/US sessions.
Michael Dell
Michael Dell Jul 18, 2021 9:58PM ET
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Barani Krishnan You are an ignorant ape..Shouldnt be talking oil
Barani Krishnan
Barani Krishnan Jul 18, 2021 9:58PM ET
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Michael Dell  That reference wasn't meant for you, but seeing that you've called for $200 oil yourself, I shall not say more :)
Robert Cutler
Robert Cutler Jul 18, 2021 9:51PM ET
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Is crude oil going to fall to Putin's age
Sean Livingstone
Sean Livingstone Jul 18, 2021 9:46PM ET
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Falling oil price is a good thing for the global economy and inflation.
Barani Krishnan
Barani Krishnan Jul 18, 2021 9:46PM ET
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Yes, Sean.
 
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