Crude-oil prices fell below $70 a barrel, poised for their biggest daily percentage loss since March, as concerns over the spread of the COVID delta variant continue to cloud the demand outlook after OPEC+ reached a deal to boost oil production.

“The rise in the delta variant has not only hindered OPEC’s ability to increase production without pulling down prices, but also has much broader implications for the macro trade that is not supportive of oil prices,” Troy Vincent, market analyst at DTN, told MarketWatch.

He expects a strengthening U.S. dollar, weakening Chinese and global economic growth, rising production from the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, and resilient non-OPEC production to “keep a lid on crude prices in the second half of the year.”

“Global refinery runs simply cannot return to pre-COVID levels until developing nations see vaccination rates rise significantly and international travel returns to normal levels, and with the fall-winter seasonal virus period approaching for the Northern Hemisphere that isn’t going to happen anytime soon,” said Vincent.

Still, the market may see “a short-term bounce in prices after the sharp selloff,” he said.

West Texas Intermediate crude for August delivery 
CL00,
-6.64%

CLQ21,
-6.75%

dropped $4.82, or 6.7%, to $67.03 a barrel on the New York Mercantile Exchange. The U.S. benchmark last week ended down 3.7%, the biggest weekly fall for a front-month contract since the week ended March 26, according to Dow Jones Market Data.

September Brent crude
BRN00,
-6.03%

BRNU21,
-6.03%
,
the global benchmark, tumbled $4.37, or 5.9%,to $69.22 a barrel. The contract saw its biggest weekly slide since May last week, dropping 2.6%.

Front-month WTI and Brent crude were on track to suffer the largest single-session percentage declines since March, and lowest settlements since early June, FactSet data show.

The oil cartel and its allies announced Sunday that production levels will be boosted by 400,000 barrels a day each month starting in August, and eventually unravel curbs put in place last year in response to the COVID-19 pandemic. An agreement had been held up by a weekslong standoff between Saudi Arabia and the United Arab Emirates over how much the latter would be allowed to pump.

One sticking point from the U.A.E. was its insistence that the baseline used to determine its output level be raised. OPEC+ on Sunday agreed to lift baselines for the U.A.E. and several other countries in May 2022.

“The agreement, which was reached during an OPEC+ videoconference at the weekend, is actually better for the oil market than the unclear situation of the past two weeks because it restores customer confidence,” said Eugen Weinberg, head of commodity research at Commerzbank, in a note to clients.

The monthly increases will add a cumulative 2 million barrels a day of production by the end of the year, though investors must also consider the higher baselines given to the U.A.E., Iraq, Kuwait, Saudi Arabia and Russia, he said. “In total, the basis is to be raised by over 1.6 million barrels per day, meaning that more OPEC+ crude oil will be available in the longer term,” said Weinberg.

“This could weigh on oil prices next year as it is unclear whether the market will need this additional oil,” he added, but expects disciplined compliance with the plan will keep prices stable in the next few months.

Goldman Sachs strategists said they don’t think the OPEC+ deal is bearish for prices, “with supply increasingly becoming the source of the bullish impulse and evidence of non-OPEC supply shortfalls likely in the coming months (including shale discipline in the coming earnings season).”

A team led by Damien Courvalin said oil prices will likely gyrate in coming weeks amid concerns over the delta variant of COVID-19 and “the slower velocity of supply developments relative to recent mobility gains.” Concerns over rising cases due to the delta variant were weighing on stock markets to start the week.

“With most of our expected summer demand gains already achieved and with headwinds growing from the delta COVID variant, we believe that the catalyst for the next leg higher in prices is shifting from the demand to the supply side, with upside risks to our price forecasts in the coming months as a result,” said the Goldman strategists.

The energy sector overall was largely under pressure, with August gasoline 
RBQ21,
-5.74%

down 5.8% to $2.12 a gallon and August heating oil 
HOQ21,
-5.48%

down 5.6% to nearly $2 a gallon.

Bucking the trend, August natural gas 
NGQ21,
+1.74%

rose 1.6% to nearly $3.73 per million British thermal units.

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