A new OPEC+ deal to hike production volumes this year and throughout 2022 combined with rising COVID-19 fears and a broad Wall Street selloff sent crude prices plunging July 19 for the biggest single-day drop since the historic April 20, 2020, negative pricing event.
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Front-month NYMEX WTI plummeted more than 7%, down $5.39, to settle at $66.42/b, while ICE September Brent shed $4.97 to settle at $68.62/b.
NYMEX August RBOB fell by 14.32 cents to $2.1104/gal, and August ULSD dropped 12.81 cents to $1.9852/gal.
The Dow Jones Industrial Average nosedived by more than 900 points during July 19 New York trading as rising fears of the rapidly spreading COVID-19 delta variant triggered a market selloff. Energy futures were doubly shaken by the July 18 OPEC+ deal that not only returns crude production through the rest of 2021, but also throughout 2022. Adding additional tensions, the US and China are clashing over the US and NATO allies accusing China of major cybersecurity hacks.
"Travel and hotel stocks are getting crushed today as concerns grow that crude demand outlook might have overly priced in a normal summer abroad," said Edward Moya, senior market analyst for OANDA. "Jet fuel demand will struggle as international travel is not happening anytime soon, especially given how ... Americans are struggling to get their passports renewed even with expedited services. Even domestic travel to Hawaii is losing appeal given the limited availability for car rentals, lack of hospitality workers and extreme price hikes for lodging and dining."
OPEC+ is striving for a reasonably balanced market by ending its stalemate with the United Arab Emirates, according to energy analyst Bill Herbert of Simmons Energy, but the new deal also allows for Saudi Arabia, Russia and others to push their production volumes above pre-pandemic levels next year.
"It appears that OPEC+ is also signaling an intent to increase production not just for the balance of this year, but over 2022 as well," Herbert said in an analyst note. "Thus, the revised OPEC+ production strategy, should 2022 demand estimates prove to be prescient, implies less room for non-OPEC+ production next year than many may believe."
As Simmons analyst Pearce Hammond added, "OPEC+ plans to not only regain, but increase market share and bring back all of the oil production that was cut (due to the pandemic) by the latter part of 2022."
The deal allows OPEC and its allies to ease production cuts 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 deal also extends the OPEC+ supply management pact to the end of 2022, from its previous expiry of April 2022.
The UAE will receive a 332,000 b/d boost to its reference production level, from which quotas are determined, starting in May 2022. But Saudi Arabia and Russia also get 500,000 b/d baseline increases each, while Iraq and Kuwait will receive 150,000 b/d hikes, in a surprise compromise. These extra volumes next year come in addition to the Saudis planning to unwind their additional voluntary cuts.
"In July and August, OPEC+ pledges grow by 1.2 million b/d (400,000 b/d of Saudi's voluntary cut, 440,000 b/d July quota rise and 400,000 b/d August quota rise), still below our forecast call on OPEC+ growth of 3.5 million b/d," according to S&P Global Platts Analytics. "We forecast supply to grow by 1.8 million b/d over the same two months. With surging summer demand and OPEC+ restraint, short-term fundamentals remain tight."
Coronavirus concerns grow
And none of this is occurring in a vacuum since the vast majority of the world remains unvaccinated while the coronavirus delta variant spreads worldwide from Asia to North America.
"The world needs a reality check," World Health Organization epidemiologist Maria Van Kerkhove recently said, arguing the world is moving further away from the end of the pandemic.
New infections have spiked in much of Asia, Europe, Australia and Africa, with Indonesia becoming a major new hot spot, while US COVID-19 cases surged by about 70% last week, fueled by the delta variant.