Oil Stumbles, But Fundamentals Remain Supportive

Oil futures sold off heavily on Monday, with global benchmark Brent losing 3.3%. Market sources said the drop was likely technical in nature and that oil remains poised to make further gains through the end of the year. In London, Brent crude for October delivery settled down $2.52 at $72.89 per barrel. In New York, September West Texas Intermediate (WTI) on Nymex sank $2.69 to close at $71.26/bbl, while the October contract ended the session $2.62 lower at $70.61/bbl. Some sources said concerns about the economic recovery from the Covid-19 pandemic, particularly in Asia, dinged oil prices. Chinese factory performance slowed dramatically in July, and the spread of the Delta variant continues in the region. “Australia, Japan and many other Asian countries had to introduce fresh restrictions, while rising cases in the US is starting to raise some alarm bells,” noted Fawad Razaqzada of ThinkMarkets. Such developments hamper demand for transportation fuel and come on the heels of the Opec-plus coalition's recent decision to raise production quotas (OD Jul.19'21). Those headlines started a domino effect, said Phil Flynn of Chicago’s Price Futures Group, serving as a catalyst for some profit-taking after oil’s sharp rally in recent weeks and triggering some larger selling. “When you move up as fast as we did, you tend to see a little profit-taking and then the market tries to find out where support kicks in, to 'refill' some of the recent uptrend,” he explained. From a fundamental perspective, multiple sources said, oil still has significant support. While Opec and its allies have indeed opened the taps and the Delta variant of Covid-19 remains a headwind that could intensify, inventories remain set to draw further. “Although the pace of stock depletion is slowing, OECD oil inventories that are already below the 2015-19 average are set to decline, further supporting oil prices,” said Tamas Varga of oil brokerage PVM. “The solid economic background and the continuous market management [of the Opec-plus] alliance strongly suggest stable-to-stronger oil prices for the rest of the current year, with the often-cited $80/bbl target coming into sight toward the end of 2021." To wit, the oil market’s current structure suggests tightness going forward. While prices have and continue to fluctuate widely on a day-to-day basis, they are doing so above the $70 mark for WTI. “There’s going to be a lot of volatility because of the unknowns in the market right now,” particularly the impacts of the spread of the Delta variant, Flynn said. “But fundamentals have been pretty positive.” Forward curves for both major benchmarks are in backwardation, with front-month deliveries trading at a premium to later-dated contracts. Global benchmark Brent’s 12-month spread sees September trading almost $4 above the same month next year. The physical market is also signaling strength, with dated Brent posting a roughly $1 premium to the derivative futures contract traded on London’s ICE. Frans Koster, New York