Oil heads for 7% weekly drop as Delta variant spreads

[August 20, 2021]  By Dmitry Zhdannikov

LONDON (Reuters) -Oil prices were down for a seventh straight session on Friday near three-month lows and heading for a weekly loss of over 7% as new lockdowns in countries facing surging cases of the COVID-19 Delta variant dampened the outlook for fuel demand.

Broader investor risk aversion also weighed on oil with the U.S. dollar jumping to a nine-month high on signs the U.S. Federal Reserve is considering reducing stimulus this year.

"The spread of the Delta variant amid moderating economic growth and the prospects of tighter monetary policy are creating short-term ripples in the commodity market," ANZ commodity analysts said in a note.

"Increasing restrictions on mobility are raising concerns for oil demand."

Brent crude futures fell 1.08 cents or 1.6% to $65.37 a barrel at 1215 GMT, near their lowest since May and down over 7% for the week.

U.S. West Texas Intermediate (WTI) crude futures for September, due to expire on Friday, fell 1.07 cents or 1.7% to $62.62 a barrel and were down over 8% for the week.

"The latest lockdowns in major economies around the world have likely harmed the economic activities and growth forecasts in the months to come," said Margaret Yang, a strategist at Singapore-based DailyFX.

"Japan has extended its emergency lockdown and confirmed cases are on the rise in countries such as South Korea, Malaysia, Philippines, Vietnam and Thailand, whose industries need oil, which will also be affected by the Delta variant," Yang added.

China has imposed new restrictions with its "zero tolerance" coronavirus policy, affecting shipping and global supply chains, and the United States and China have imposed tit-for-tat flight capacity restrictions.

Meanwhile Delta variant outbreaks in Australia and New Zealand have also sparked strict lockdowns.

The approaching end of the U.S. peak gasoline demand season and end of summer holidays in Europe and the United States are also set to sap oil demand.

"Aviation remains the weakest component of global demand at the moment, and the risk of further restrictions on domestic and international travel due to the Delta variant will be a key variable for oil over the remainder of H2, particularly as the U.S. driving season ends," said Stephen Innes, managing partner of SPI Asset Management.

(Reporting by Dmitry Zhdannikov in London, Sonali Paul in Melbourne and Koustav Samanta in Singapore; Editing by Simon Cameron-Moore and David Evans)

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