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OIL FUTURES: Crude rally extends as market eyes tightened supply outlooks

Highlights

Delta concerns ease amid vaccination push

OPEC+ to raise output Aug. 1

ICE Brent backwardation hits 22-month high

Crude futures extended their bull run July 30, settling higher for a third straight session, as the market looked past pandemic-related demand concerns toward tightened supply outlooks.

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NYMEX September WTI settled 33 cents higher at $73.95/b and ICE September Brent climbed 28 cents to finish at $76.33/b.

"Despite the numbers of new cases remaining at a high level, the oil market no longer appears to be viewing the issue of the delta variant with quite the same alarm as it was at the beginning of last week," Commerzbank analyst Carsten Fritsch said in a note. "Apparently there is confidence that the ongoing vaccination campaigns in the industrialized countries will prevent any reintroduction of widespread mobility restrictions. The most recent wave in the spring already had a far less serious impact on oil demand than at the start of the pandemic."

NYMEX August RBOB settled up 1.45 cents at $2.3659/gal and August ULSD moved 1 cent higher to $2.1994/gal.

The OPEC+ group is slated to increase collective crude output 400,000 b/d beginning Aug. 1, however this supply bump is unlikely to derail the markets current tightening outlook, analysts said.

"Rising energy supply risk should continue to support higher prices," TD Securities analysts said in a July 30 note. "With the demand outlook shaking off delta variant concerns, the OPEC+ supply increases are likely to underwhelm. This should ultimately keep the market on a tightening trajectory and supporting higher spot prices and timespreads in the coming months."

Front-month Brent and WTI have rallied more than 11% from their most recent nadir on July 19 and are now within 2% of their most recent highs seen in early July. However, the rally in forward-dated contracts has significantly lagged.

The year ahead WTI contract settled at a $7.30/b discount to front month July 30. While this is the widest backwardation since July 13, the spread is still roughly $1/b weaker than its most peak in early July.

In contrast, the backwardation in front-month versus year-ahead ICE Brent futures climbed to $7.13/b, the widest since Sept. 16, 2019. Still, year-ahead ICE Brent is up just 7.8% from its July 19 low, compared with 11.2% for the front-month contract.