Oil rises but set for 5% weekly drop as Delta variant spreads

© Reuters. A 3D printed oil pump jack is seen in front of displayed stock graph in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration

By Koustav Samanta and Sonali Paul

SINGAPORE (Reuters) -Oil prices steadied on Friday, clambering away from three-month lows, but they were still on track for a weekly loss of more than 5% as new lockdowns in countries facing surging cases of the COVID-19 Delta variant dampened the outlook for fuel demand.

Broader investor risk aversion also weighed on oil with the U.S. dollar jumping to a nine-month high on signs the U.S. Federal Reserve is considering reducing stimulus this year.

"The spread of the Delta variant amid moderating economic growth and the prospects of tighter monetary policy are creating short-term ripples in the commodity market," ANZ commodity analysts said in a note.

"Increasing restrictions on mobility are raising concerns for oil demand."

Brent crude futures rose 24 cents or 0.4% to $66.69 a barrel at 0635 GMT, after dropping 2.6% on Thursday to its lowest close since May.

U.S. West Texas Intermediate (WTI) crude futures for September, due to expire on Friday, rose 38 cents or 0.6% to $64.07 a barrel , after sliding 2.7% on Thursday. The more active October contract was up 26 cents at $63.76 per barrel.

"The latest lockdowns in major economies around the world has likely harmed the economic activities and growth forecasts in the months to come," said Margaret Yang, a strategist at Singapore-based DailyFX.

"Japan has extended its emergency lockdown and confirmed cases are on the rise in countries such as South Korea, Malaysia, Philippines, Vietnam and Thailand, whose industries need oil, which will also be affected by the Delta variant," Yang added.

China has imposed new restrictions with its "zero tolerance" coronavirus policy, affecting shipping and global supply chains, and the United States and China have imposed tit-for-tat flight capacity restrictions.

Meanwhile Delta variant outbreaks in Australia and New Zealand have also sparked strict lockdowns.

The approaching end of the U.S. peak gasoline demand season and end of summer holidays in Europe and the United States are also set to sap oil demand.

"Aviation remains the weakest component of global demand at the moment, and the risk of further restrictions on domestic and international travel due to the Delta variant will be a key variable for oil over the remainder of H2, particularly as the U.S. driving season ends," said Stephen Innes, managing partner of SPI Asset Management.