Oil prices drop with Delta spread weighed against tight supply

Oil pared an earlier loss as investors assessed the outlook for demand amid a resurgence in Covid-19.

Futures in New York dropped to trade near $72 a barrel after a volatile week of trading that saw prices swing wildly in a $7 range. There are signs that demand for fuels such as gasoline has increased as vaccination programs are rolled out, although the fast-spreading delta variant has raised concerns about the short-term outlook. Tight restrictions have been renewed including curfews in some places.

The latest virus flare-up has coincided with a salvaged OPEC agreement to add more barrels from August, whipping up stiff headwinds for oil and interrupting a price rally. Expectations are for a continued tightening of the market throughout the rest of 2021, however, leading to even higher prices.

Crude’s recent bout of price volatility comes hot on the heels of one of the biggest speculative washouts in years. Money managers cut their net-long positions in WTI by the most since 2017 last week. Traders are now keenly focused on whether the delta variant will spark a renewed selloff in crude.

“There is seemingly a battle within the energy complex between the prevailing supply deficit engineered by OPEC and the threat of the COVID-19 Delta variant in regions with low vaccination rates," said Kevin Solomon, an analyst at brokerage StoneX Group.

The prompt time spread for Brent was 70 cents a barrel in backwardation -- a bullish market structure where near-dated prices are more expensive than later-dated ones. That compares with 88 cents at the beginning of July.

Covid-19 infections globally increased the most in two months as the spread of the delta variant, a surge across the U.S., and low levels of vaccination in most Southeast Asian nations led to higher numbers. Countries including Thailand and Vietnam are imposing curfews in cities to battle the surge in cases.