DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session sharply lower amid renewed concern that a rapidly spreading Delta coronavirus variant, first detected in India and believed to be more contagious compared with the original COVID-19 strain, would undercut recovery in global air travel and fuel demand this summer.

The European Union, Australia and parts of Southeast Asia issued new travel restrictions Monday to limit the spread of the Delta variant that has spread through India like wildfire in 2021. A more contagious variant has already prompted regional lockdowns from Australia to Russia as the rollout of vaccination campaigns has been too slow and inadequate to stop community spread of the variant. In Australia, only 4% of the population has received vaccines against COVID-19 compared with more than 46% in the United States and 47% in the United Kingdom, according to World Health Organization data. In the European Union, where vaccination campaign has markedly picked up speed over the past few weeks, the headlines over the rapidly spreading variant proved to be sufficient to reintroduce new travel restrictions, with Portugal, Germany and Spain announcing the rollback of border re-openings.

Market optimism over a demand recovery following more than a year with COVID was a key factor in propelling oil futures sharply higher in the second quarter, with West Texas Intermediate and Brent futures rallying to their highest trades in 32 months overnight. Part of that optimism was tied to expectations for the return of international air travel in the second half of the year. With the rapid spread of the Delta variant, some of the bullish sentiment could come undone, as traders reassess their expectations for the summer fuel outlook.

At settlement, NYMEX August WTI dropped $1.14 to below $73 barrel (bbl) after trading at $74.45 overnight, the highest trade on the spot continuous chart since early October 2018. ICE August Brent crude futures declined to $74.68 bbl after trading at a $76.60 33-month spot high overnight, and ahead of expiration Wednesday afternoon. September Brent settled with $0.54 discount. NYMEX July RBOB futures were down 4.73 cents or 1.9% to $2.2166 gallon ahead of expiration this week, with the August contract trading near parity. July ULSD futures settled down 3.11 cents at $2.1182 gallon, with the August contract at a 26-point premium.

Oil futures began drifting lower early Monday after reports emerged that factory activity in China slowed in June due to a viral outbreak. This comes on the heels of reduced operations at China's Yantian Port earlier this month. Located in the southeast province of Guangdong, the Yantian Port, which handles a multitude of container ships including very large container ships, was hit with a worker shortage because of spiking COVID infections, reducing operations for a month through last week to further aggravate delays in executing global trade while worsening a container shortage.

WTO said on Monday G20 economies still have not lifted about 50% of pandemic-related trade barriers as of June.

Separately, oil traders are closely following the chatter around this week's meeting among the Organization of the Petroleum Exporting Countries, Russia and nine additional oil-producing nations scheduled for Thursday (7/1). OPEC+ is widely expected to agree to add another 500,000 barrels per day (bpd) in crude production for the next three months beginning in August. However, the pace at which the alliance will bring back production will largely depend not only on the success in containing the spread of the virus and demand growth but also the timing of the eventual return of Iranian barrels to the market.

OPEC+ is set to add 441,000 bpd of crude oil production in July and Saudi Arabia to finish unwinding an additional 1 million bpd in a unilateral output cut next month as previously agreed. During the height of the pandemic, OPEC+ cut crude oil production by 9.7 million bpd and will have returned 4 million bpd of those cuts by the end of July.

Liubov Georges can be reached at liubov.georges@dtn.com