Crude falls as OPEC+ reaches deal, pandemic concerns weigh

0253 GMT: Crude oil futures declined during the mid-morning trade in Asia July 19, as the market participants were concerned over a rise in supply following an OPEC+ deal to an impending increase in production quotas, while the rapid spread of the Delta variant of the coronavirus raised worries about the re-imposition of demand-sapping mobility restrictions.

At 10:53 am Singapore time (0253 GMT), the ICE September Brent futures contract was down $1.20/b (1.63%) from the previous close at $72.39/b, while the NYMEX August light sweet crude contract was down $1.14/b (1.59%) at $70.67/b.

"A cocktail of bearish factors are causing the fall in prices we are seeing this morning, and one of them is the impending increase in OPEC+ supply after the coalition reached a deal to ease production quotas," David Lennox, resource analyst at Fat Prophets, told S&P Global Platts on July 19.

The OPEC+ producer group, on July 18, reached an deal to increase its production quotas by 400,000 b/d each month starting in August, amounting to a 2 million b/d total increase by the end of the year. The agreement also involved an extension of the coalition's supply management pact through to 2022.

The OPEC+ resolution puts an end to an acrimonious spat between Saudi Arabia and the UAE, which had arisen after the UAE had objected to Saudi Arabia's plan to tie OPEC+ production increases to a lengthening of the supply management pact, insisting that its baseline production level, from which its quota is determined, be raised first.

In an appeasement to the UAE, the country will receive a 332,000 b/d boost to its reference production level, from which quotas are determined, starting in May 2022. Meanwhile, Saudi Arabia and Russia will also be granted 500,000 b/d baseline increases, with Iraq and Kuwait getting 150,000 b/d rises.

While the compromise has brought more clarity to the supply-side of the equation in the market, it has failed to alleviate concerns of a potential breakdown in OPEC+ unity.

"There are some concerns that increasing the baseline production levels for a few countries while keeping them the same for others may lead to reduced compliance, as members left behind may act out of self-interest," Lennox said.

"[Raising the baseline production levels for some countries] appears to have opened a can of worms, with Iraq suggesting it too deserves a higher quota," ANZ analysts said in a July 19 note.

Meanwhile, analysts also said that the rapid spread of the Delta variant of the coronavirus has also soured sentiment in the market, as countries around the world consider tightening or have tightened mobility restrictions.

"Oil dropped by the most since March last week as a resurgence in COVID-19 [infections] dented outlook for global energy demand in the near-term," UOB analysts said in a July 19 note.