Oil retreats with OPEC+ deal to boost supply, threat from delta

Oil in London declined to the lowest level in five weeks after OPEC+ agreed to boost production into 2022, while a surge of the delta coronavirus variant threatened the rebound in the global economy.

Brent futures lost as much as 2.9 per cent. OPEC and its allies will add 400,000 barrels a day each month from August until all halted output is revived. A surge in virus cases from Asia to the U.S. drove equities lower. The dollar climbed, making commodities like oil that are priced in the U.S. currency less appealing.

The OPEC+ deal, announced over the weekend after Saudi Arabia and the United Arab Emirates resolved their differences, gives traders a better view of how quickly the cartel will restore the 5.8 million barrels a day it’s still withholding. Saudi Arabia, the UAE, Iraq, Kuwait and Russia all got higher baselines against which cuts will be measured from May 2022.

“Oil will probably dance to the tune of supply side developments in the foreseeable future,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. The delta variant’s spread is raising economic growth concerns, and “fears of inflation and therefore of interest rates rise have re-surfaced.”

While supply is set to increase, some countries are reimposing restrictions to control the virus. Indonesia, Thailand, South Korea, Vietnam and Singapore are all dealing with outbreaks. U.S. infections are outpacing the rise in global cases, while the U.K. on Saturday reported the most cases since January.

Prices

  • Brent for September settlement was 2.4 per cent lower at $71.85 a barrel at 10:29 a.m. in London
  • West Texas Intermediate for August delivery fell 2.5 per cent to $70.02 a barrel

The delta strain may make oil volatile in the near term, but the deal between the Organization of Petroleum Exporting Countries and its allies would support a constructive view on prices, Goldman Sachs Group Inc. said. OPEC+’s planned supply increase was “moderate” and would keep the market in deficit, the bank said.

The agreement spans more than a year and covers millions of barrels of production, but it also remains flexible. The alliance will continue to hold talks every month from September, including a review of the market in December. It could adjust the schedule if required, said Saudi Energy Minister Prince Abdulaziz bin Salman. The next gathering is Sept. 1.

© 2021 Bloomberg L.P.

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