Oil closed lower as traders assess how the spreading delta variant will impact world fuel demand the rest of the year. Futures in New York posted a 0.2% decline in New York on Thursday after trading little changed for most of the session. Goldman Sachs Group Inc. sees the variant having a transient impact on oil demand. However, the International Energy Agency cut its global oil consumption forecasts “sharply” for the rest of this year and predicted a new surplus in 2022. “The report undercuts the almost uniformly bullish sentiment that has been hitting the market as of late,” says John Kilduff, a partner at Again Capital. “The surplus we saw in the IEA data was a bit of a shock, and investors are taking note of the potential for future over-supply.”

Over the last few months, a demand rebound in key economies such as the U.S. and Europe has helped to drain bloated stockpiles built up during the pandemic and driven prices higher, but the latest virus wave is an indication that a further recovery will be bumpy. President Joe Biden, meanwhile, urged OPEC and its allies to boost supply more quickly to make gasoline more affordable for Americans. Global demand “abruptly reversed course” last month, paring gains after surging by 3.8 million barrels a day in June, the IEA said. The agency lowered estimates for global consumption in the second half of the year by 550,000 barrels a day. “The demand outlook is highly uncertain because of the delta variant,” Toril Bosoni, head of the IEA’s oil industry and markets division, said in a Bloomberg television interview. “There could be further downside risk due to the virus in the second half,” but “there’s also upside risk” from pent-up travel demand in the U.S. and Europe.

Delta’s surge has been reflected in a weakening of the oil’s market structure. The prompt time spread for Brent settled at 40 cents a barrel in backwardation — a bullish signal where near-dated contracts are more expensive than later-dated ones. That compares with 92 cents at the end of July. Traders also eyed data released Thursday by the Producer Price Index that showed rising costs for U.S. manufacturers. “The market is responding to the PPI report showing rising costs all around, and taking it as a sign of growing inflation,” said Phil Streible, chief market strategist at Blue Line Futures LLC in Chicago.

Oil slid to a three-week low with new waves of Covid-19 exacerbating demand concerns as investors weighed concerns about a pullback in stimulus.

Futures in New York ended the day down by more than 2.6%. Federal Reserve Bank of Atlanta President Raphael Bostic said the central bank should move to taper asset purchases after another strong month or two of employment gains. At the same time, Chinese air travel dropped the most since early in the pandemic as rising cases of the delta variant spurred fresh restrictions on movement. “Chinese mobility on roads and air traffic is down, so what traders are wondering now is whether or not other large oil consuming and producing regions will start to see a China-like demobilization,” said Vikas Dwivedi, Oil & Gas Economist at Macquarie Capital. “We could see this domino effect, where other regions follow China’s lead and that would lead to lower oil demand for the remainder of this year and beyond.”

Crude has run into stiff headwinds this month as the delta variant sweeps across the globe, leading to renewed restrictions. In China, airline seat capacity has dropped 32% in a week, the most since early in the pandemic, while air-travel comebacks have stagnated in Europe and North America.

Investors are also watching a pending decision from the European Union, representatives of which are currently discussing whether or not to reverse the current policy that allows Americans into the block. A decision in the negative would “negate what could have been a better future demand profile,” Dwivedi added.

Delta is also impacting the oil market structure. The prompt time spread for Brent has narrowed to 43 cents a barrel in backwardation — a bullish signal where near-dated contracts are more expensive than later-dated ones. That compares with 69 cents a week earlier.

Crude’s plunge on Monday coincided with a broader commodities selloff, with gold earlier touching the lowest since March and copper slipping to a two-week low. “A lot of other outside markets are being liquidated,” said Phil Streible, chief market strategist at Blue Line Futures. “You’re seeing pressure come back on gold and silver, at the same time that the dollar index has turned positive.”

Oil rose for the first time this week as traders weighed the continuing spread of the delta variant against strong equity markets.

Futures in New York gained 1.4% on Thursday. The S&P 500 and Nasdaq 100 rose toward record highs, while the dollar slipped, making commodities that are priced in the currency more attractive. Still, China’s government has imposed fresh curbs and traders are weighing the risk implications of the deadly strain of the coronavirus in other regions.

“We are seeing buyers return to the market because of bullish macro market sentiments like the rise in equities,” said Spencer Vosko, director for crude oil at Black Diamond Commodities LLC in Houston.

Delta’s spread is challenging the global recovery, which had driven prices of commodities to multiyear highs late last month. The impact of the latest Chinese outbreaks can already be seen, with traffic thinning on some of the country’s typically busy city roads and raising concerns about near-term fuel demand.

Gasoline futures rose 2% with demand for the fuel in the U.S. remaining strong. The so-called gasoline crack, a rough gauge of the margin for refining crude into the motor fuel is trading at at a high not seen since last April, after Wednesday’s 5.29 million barrel decline in U.S. stockpiles.

New travel and movement restrictions in China include the capital, Beijing. Meanwhile Hong Kong has reimposed quarantine on travelers from the mainland, though an exception remains in place for the southern Guangdong province, a neighbor to the financial hub.

“Psychological expectations were for higher demand than we’ve seen in the summer in the U.S.” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “Although we’ve seen U.S. inventories normalize they are not by any means short.”

Prompt time spreads — the gap between the most immediate futures contracts and those a month later — have slumped in recent days, pointing to declining confidence in the market. First-month WTI was trading at a premium of 35 cents a barrel to the next month on Thursday, down from as high as 76 cents at the start of this week. Brent’s structure has seen a similar retreat.

West Texas Intermediate futures tumbled 3.4% to close at the lowest in more than two weeks. The delta variant of Covid-19 has been detected in almost half of China’s 32 provinces in two weeks, and at least 46 cities have advised residents against non-essential travel. Meanwhile, American crude supplies increased by 3.63 million barrels, the biggest gain since March, government data showed. Key timespreads for futures contracts tumbled in response to weakening supply-demand fundamentals.

“The resurgence in Covid infections in China is dampening perceptions of demand recovery,”said Peter McNally, global head of industrials, materials and energy at Third Bridge.

After eking out a small advance in July, August is proving to be tough for crude. Tightened controls in some Asian nations to curb the spread of the virus risk eroding oil demand at a time when the Organization of Petroleum Exporting Countries and its allies are gradually increasing supply.

The gloomy demand outlook continued to weaken timespreads in the U.S. oil market on Wednesday though the benchmark is still holding a bullish backwardation structure in which near-dated prices are trading at a premium to those further out. October futures traded at 44 cents a barrel above the November contract Wednesday, compared with more than $1 a month ago.

U.S. gasoline inventories fell 5.29 million barrels to the lowest volume since November, while a gauge of fuel demand, total products supplied, was steady, the Energy Information Administration said.

“We’re seeing a continued increase in fuel consumption, which is a good sign of economic recovery. While there is clearly concern about the delta virus, overall we’re seeing continued recovery on the demand side,” said Quinn Kiley, portfolio manager at Tortoise.

China’s latest outbreak has spread to Beijing despite the capital’s stringent measures, with authorities taking steps Tuesday to ban rail passengers from 23 regions. The financial hub of Shanghai also reported a virus case this week. As risks escalate, analysts are reviewing their economic growth projections.

There have also been rising tensions near the Persian Gulf — a region vital for the world’s oil markets — in the past week. The British Navy said a ship was safe following a possible hijacking near Iran, days after a deadly drone attack on a tanker that the U.S., U.K. and Israel all blamed on the Islamic Republic.

“China demand concerns because of the renewed restrictions from the viral spread were what caused the earlier weakness,” said Phil Flynn, senior market analyst at Price Futures Group.

Meanwhile, in the U.S., crude stockpiles fell 879,000 barrels last week and gasoline supplies dropped by 5.75 million barrels, according to people familiar with the industry-funded American Petroleum Institute’s inventory data on Tuesday. Crude rallied strongly in the first half of the year as the roll out of vaccines allowed major economies to reopen, boosting oil demand and draining the glut built up during initial waves of the pandemic. However, the fast-spreading delta variant has led to renewed restrictions in many countries. “Asia-Pacific is currently the focal point of lock downs,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. “There are 887 million people worldwide are currently in lock down, which is more than at the beginning of 2021, and 85% of them are in Asia-Pacific.”

Crude’s decline also put the U.S. benchmark under technical pressure. WTI fell below its 50-day moving average and is edging closer to its 100-day moving average. Such moves can often spark additional selling from trend-following funds.

The API also reported U.S. distillate inventories fell 717,000 barrels last week and supplies at the Cushing, Oklahoma, storage hub rose by 659,000 barrels. The U.S. government will report its stockpile data on Wednesday.