Oil Plummets on OPEC Agreement And Covid Fears, But Analysts Maintain Positive Outlook

CITI sees oil hitting $85 due to pent up leisure demand: File Image/Pixabay

Oil on Monday plummeted by $5 per barrel, the worst showing since March, after the Organization of the Petroleum Exporting Countries (OPEC) and its allies reached a compromise to boost oil supply from August by 400,000 barrels per day (bpd), in a bid to moderate prices.

The losses were also said to have been stoked by the perception that rising Covid infections in some parts of the world would compromise demand recovery: “The market is very fixated on the potential for the Delta variant exploding,” said Phil Flynn, senior market analyst at Price Futures Group Inc., adding, “Because of that, we’re getting a run on the bank.”

Brent on Monday settled down $4.97, or 6.8 percent, at $68.62 per barrel, while West Texas Intermediate settled down $5.39, or 7.5 percent, at $66.42.

As usual, investors' fears didn't correlate with demand outlook from the analytical community: Goldman Sachs on Monday pointed out that the OPEC agreement was in line with its view that producers “should focus on maintaining a tight physical market all the while guiding for higher future capacity and disincentivising competing investments."

The bank reiterated that it sees more upside in the second half of this year.

John Kilduff, founding partner at Again Capital, seemed also to question the mindset of investors: “We still face a significant deficit in terms of supply versus demand, but for now, the additional [OPEC] barrels are seen as enough to deflate and kill the recent rally.”

Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, remarked, “We think the market can absolutely absorb the additional 400,000 barrels per month...this is a constructive agreement.”

One country that would welcome more stable oil prices is India, whose wholesale price inflation accelerated to at least a 15-year high of 12.94 percent year-on-year in May due to a spike in energy prices; Rameswar Teli, the country's junior oil minister, told lawmakers that “The government has been taking up the issue, bilaterally with crude oil-producing countries as well as with OPEC, for affordable crude prices for consuming countries like India.”

For his part, John Kemp, commodities analyst at Reuters, said the OPEC deal "should be enough to end market talk of $100 a barrel oil, at least for now," but he added that the agreement "doesn’t necessarily end the bullish case for oil demand."

Finally, CITI on Monday said it predicted Brent and WTI would climb to $85 or higher later this year: “The summer season for petroleum markets should be stronger than usual this year on pent-up leisure demand.”