“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.

Oil tumbled by the most in two weeks as a fast-spreading delta variant posed a threat to demand and as economic data out of China signaled a slowdown.

Futures in New York declined 3.6% on Monday. The virus is clouding the outlook for consumption as China faced a fresh outbreak and infections in Sydney matched a record. Amid the surge in cases, barrels from some key OPEC producers are hitting the market, also causing concern. Meanwhile, data indicated that China’s economic activity eased in July.

The government in China has made steps to curb commodity inflation and those are having an impact, according to Rebecca Babin, senior energy trader at CIBC Private Wealth, US. “The next round of data from China on crude import numbers will be critical in figuring out how China is handling the most recent uptick in infections,” she said.

Crude prices are off to a shaky start in August after July’s small gain with the resurgence of Covid-19 offsetting the global demand recovery. Saudi Arabia, Kuwait and the United Arab Emirates, three core OPEC oil exporters in the Middle East, boosted their crude shipments to multi-month highs in July, underscoring a return of the nations’ supply into an uncertain global market.

Oil has “given back some of last week’s gains in response to weaker China data and continued worries about the spread of the delta variant,” said Ole Hansen, head of commodities research at Saxo Bank A/S. Crude has settled into a range “with delta demand worries offsetting the current tight supply outlook.”

Meanwhile, the U.S. and Israel vowed to respond to a deadly drone attack on a tanker last week in a major waterway for global oil shipments that they blamed on Iran. Middle East foes Iran and Israel have traded multiple accusations of shipping attacks in recent months. But Thursday’s strike off the coast of Oman, which Tehran denied carrying out, was the first to kill crew members — a Romanian and a Briton.

Oil posted its fourth straight monthly gain as steady demand and tight supplies calmed concerns that a new wave of Covid-19 infections would cripple energy consumption.

Futures in New York ended the week 2.6% higher. While cases of the virus’s delta variant have surged in recent weeks, mobility and other data point to strong demand in key economies that traders are watching. India posted the biggest gain in driving activity after restrictions were rolled back. “All the data right now is really positive,” said Rebecca Babin, senior energy trader at CIBC Private Wealth, US. “That’s what you’re seeing. We do have tight supplies right now, so it’s really hard for the commodity to pull back.”

Oil futures are closing out a volatile July that saw prices whipsawing as the pandemic threatened to derail the economic recovery. Crude supplies are expected to remain tight through the end of the year, supporting the recent rally. “It’s going to mostly grind higher,” said John Kilduff, a partner at Again Capital, adding that he sees West Texas Intermediate prices at $80 a barrel in the near-term.

Executives at Exxon Mobile Corp. and Chevron Corp. reiterated that spending would remain low and offered no signs of returning to growth-at-all-costs mode. Exxon also said surplus cash will go towards debt reduction. Chevron said it is “cautiously” watching OPEC and its allies for further output.

On Friday, two crew members were killed when an oil products tanker with links to Israel came under attack off the coast of Oman. Such incidents can add to price volatility in a tightly supplied market.

Meanwhile, investors are also keeping an eye on commentary from the U.S. oil industry, which reports earnings this week. While companies have maintained discipline and focused on returns for shareholders, higher oil prices could encourage increased output.

“It’s a matter of when, not if, before we see more of a supply response in the U.S.,” said Haworth.

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U.S. demand is “pretty healthy from an inventory perspective,” said Brian Kessens, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. While the delta variant bears watching, in the U.S. “to date, it hasn’t had any impact on mobility at all,” he said.

Global oil prices have rallied this year with an economic recovery underway following vaccine campaigns. However, the delta variant’s recent surge is posing a threat to the commodity’s rally — and short-term demand — as a rapidly rising case count has led many countries to impose restrictions. “The oil market is just waiting for the moment to get the all-clear signal that the delta variant risk is just a blip on the overall outlook,” said Ed Moya, senior market analyst at Oanda Corp.

Deutsche Bank sees Brent prices at $72 in the second half of this year, as speculative interest wanes but the market remains supported by deficits averaging 900,000 barrels per day through the rest of the year, said analyst Michael Hsueh in a recent note to clients.

The EIA data also showed jet fuel demand rising in the U.S., with the moving average climbing to about 1.5 million barrels a day, the highest since March 2020. Inventories at the nation’s largest storage hub in Cushing, Oklahoma, slid to the lowest level in more than a year.

Meanwhile, returns from converting crude into gasoline have surged in recent weeks from the U.S. to Asia, where they’ve hit the highest level since April 2019. However, the spread of the delta variant has presented a challenge to refiners ready to put the worst of the Covid-19 pandemic behind them. Processors want to cash in on better margins, but are wary that renewed demand weakness could lead to a surplus of fuels and sink profits again.

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The resurgence of coronavirus cases has created volatility in the oil market and interrupted a steady price rally this year. Money managers cut their net-long positions in the U.S. crude benchmark by the most since 2017 last week as the delta variant shook broader markets. “There is seemingly a battle within the energy complex between the prevailing supply deficit engineered by OPEC+ and the threat of the COVID-19 Delta variant in regions with low-vaccination rates,” said Kevin Solomon, an analyst at brokerage StoneX Group.

Investors are also awaiting earnings reports from major oil companies such as Exxon Mobil Corp this week. Last week, U.S. shale producers suggested slowing production growth in the latter half of the year and continued discipline. “There’s been a lot of talk, and a lot of action on capital discipline, there’s no doubt on that,” said McNally. “But it’s hard to pinpoint the exact week, day, that we do see this turn in supply and it’s something we’re certainly going to watch a bit more closely.”

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