Oil Buckles Under Delta, Chinese Economic Data

Oil futures dropped on Monday but recovered from session lows, keeping a hold above key support levels as the market digested economic data from China against the persistent backdrop of the Covid-19 pandemic. Crude traded in close correlation with equities, which also dropped on the day. In London, Brent crude for October delivery settled down $1.08 at $69.51 per barrel. In New York, September West Texas Intermediate (WTI) closed $1.15 lower at $67.29/bbl while the October contract lost $1.16 to end the session at $67.05/bbl. Both benchmarks flirted with breaking below key support levels, but a mid-session rally helped keep them afloat. However, traders said, a break lower remains possible. “With Brent turning lower in front of the 22- and 50-day moving averages, once again the door is wide open for further downside,” noted Brian Larose of ICAP. Bear Fodder Traders and analysts said that several factors were informing Monday’s sell-off, particularly data on retail sales and industrial activity in China that were below consensus expectations. While oil prices have managed to keep their head above water last week, “sluggish Chinese industrial production, lower-than-expected retail sales and falling crude oil demand from refiners in the world's second-biggest economy” are pressuring crude, noted Stephen Brennock of oil brokerage PVM. The data’s impact comes against the broader backdrop of the ongoing spread of the Covid-19 pandemic. The outbreak of the Delta variant has prompted several groups, including the International Energy Agency (IEA), to revise demand projections lower (IOD Aug.12'21). “The spread of the Delta variant [is] causing more restrictions in several oil-consuming Asian countries," warned Fawad Razaqzada of ThinkMarkets. "So there is a risk prices could weaken further this week." Dollar Stands Taller Meanwhile, the US dollar gathered strength, a dynamic analysts say presents headwinds for oil by making the commodity more expensive. However, the relationship between physical and so-called paper oil markets as well as the forward curve for both benchmarks suggests continued -- if easing -- tightness. Dated Brent continues to trade at a premium to its derivative futures contract on ICE, a dynamic that typically signals financial markets are underpricing oil. The forward curve also remains in backwardation, with front-month barrels trading at a premium to later-dated contracts. That structure signals a market short of oil and incentivizes near-term selling, helping to drain inventories. However, the premium for dated Brent is narrowing, as are time spreads. Frans Koster, New York