Oil futures: Brent drops below $75.00/b as demand concerns grow

28 Jun 2021

Quantum Commodity Intelligence – Brent prices have fallen along with the dollar as the market reacts nervously to the prospect of the Delta variant of Covid, already prevalent in Southeast Asia and Australia, surging in Asia and Europe.

Front-month August Brent futures were trading at $74.90/barrel (1700 GMT), down from Friday’s settle of $76.18/b, and down from a fresh 32-month high of $76.55/b earlier in the session.

At the same time, August WTI was trading $73.02/b, down from Friday’s settle of $74.05/b.

Malaysia extended its month-long lockdown, Bangladesh imposed a fresh lockdown from Monday and Indonesia recorded a new high of 21,000 infections a day.

In Australia, new restrictions were imposed in Sydney and Darwin.

In Europe, German Chancellor Merkel had called for the EU to designate the UK a “country of concern” because the Delta variant is so widespread, which would mean UK travellers would need to quarantine if they visit the EU, regardless of whether they were already vaccinated.

“The forecast for oil demand recovery over the summer may be a bit overestimated and traders are facing a reality check this week,” noted analysts for Rystad Energy.

“The market consensus is that OPEC+ will likely raise production by about 500,000 bpd for August, which would still be a net positive for oil prices as it doesn’t fully satiate the swiftly growing demand profile over summer, depending on the Delta variant developments of course. “

Rystad believe OPEC+ should take a more cautious approach, only raising production by 100,000 to 200,000 bpd month-on-month in August, due to uncertainty over the Delta variant and a potential Iran deal.

Market watchers say a 500,000 bpd increase by OPEC+ is largely factored into pricing, with the market shrugging off reports that OPEC+ consensus was moving towards an output hike.

“The prospect of additional supply should have been a dampener, but it wasn’t because 500,000 bpd will plug only a part of the supply shortfall anticipated by the market,” said Singapore-based analyst Vandana Hari.

OPEC+ will turn to the latest demand figures before making any final decision, but the Delta strain of the COVID-19 pandemic and its impact on oil consumption is expected to figure prominently.

“We expect the OPEC+ alliance will try to balance the market’s need for more supply against the fragile nature of the recovery in demand, at next week’s meeting. We expect a small increase of around 500,000 bpd in August, which is likely to support higher prices,” said Daniel Hynes, senior commodity strategist at ANZ.

Meanwhile, an immediate lifting of Iranian sanctions is seen as unlikely, despite recent claims from the Iranian side.

"Any rapid return of Iranian exports also seems unlikely, despite the latest remarks from the Iranian side about an imminent agreement in the nuclear dispute with the US. As the US Secretary of State remarked, the lack of a monitoring deal between Iran and the International Atomic Energy Agency (IAEA) poses a serious obstacle to the reinstatement of the nuclear agreement," said Commerzbank Monday.