Massive risk aversion was triggered by rising concerns over a fast-spreading delta Covid variant
Oil prices plunged over 7% on Monday, recording their biggest one-day drop since September amid an aggressive sell-off in the global financial markets. Massive risk aversion was triggered by rising concerns over a fast-spreading delta Covid variant in some parts of the world, forcing investors to pare back their expectations for the economy.
Furthermore, the oil market was disappointed by the news that OPEC and its allies agreed to raise output by 400,000 barrels each month beginning in August. An OPEC+ agreement to boost output triggered fears of a surplus just as rising virus infections threaten global energy demand.
Against this backdrop, Brent crude dipped below the $70 figure to register nearly two-month lows around $67.80 before bouncing slightly. Today, oil prices extended the recovery to $69.60, struggling to regain the $70 barrier as traders remain cautious amid rising virus cases and persistent worries about a surplus.
In the short term, the oil market will remain vulnerable to fresh losses as the pandemic is back in focus now. Risk aversion could reemerge at any point to send the futures lower again. In this scenario, Brent crude may threaten the mentioned lows and extend losses to $66.50. On the upside, the mentioned $70 level now represents the immediate target for bulls.
Later in the day, the API report could trigger a short-term bounce in the market if the data points to a contraction in US crude oil stockpiles ahead of the official report from the EIA due on Wednesday. Also, traders will continue to monitor dollar dynamics as oil prices could come under renewed selling pressure if the greenback extends the rally to fresh multi-week highs due to its safe-haven demand.