Oil extended a sell-off yesterday triggered by concerns about additional supply coming on stream in the months ahead following a revision and extension of the OPEC+ agreement. Still, selloff intensified as gnarly press commentary rolled out on the spread of the Delta variant of COVID.

Since September, oil had its most significant one-day percentage fall, mirroring weakness in equity markets and reflecting some concerns over global growth.

Photo by Timothy Newman on Unsplash

Oil is trying to hash out a base this morning in London, but the critical litmus test will be the opening salvo in New York, where chunky futures horse-trading on the NYMEX occurs between the opening bell and 11 AM.

 Deutsche Bank Michaël Hsueh summed the recent OPEC shift up nicely" OPEC has significantly changed the landscape for oil market risks over the next 12-18 months, and without much fanfare at all. However, we should not be misled by the 'quietness' of OPEC pronouncements and the lack of media attention, and we think this is a meaningful shift in policy direction."

And with OPEC stripping off layers of supply discipline, at least on the default calendar, we can no longer expect oil prices to trade above Brent 80 per bbl. From here, we stand more attuned to downside risks than upside risks, with Brent USD 65/bbl as a near-term target.

Still, the quants suggest this correction should ignite interest among those waiting for a better entry point into a sector that offers safe double-digit FCF yield and an FCF breakeven below $40/b.

My issue is that we could be stuck in a broader risk-off environment well into August as the market remains singularly focused on the UK reopening experiment. The data point to watch - not just for the UK, but for all global assets - is the UK's hospitalizations rate. If the UK manages to make this strategy work, then oil markets will surge in mid-August along with other risk assets.