Oil prices drop 1% after Saudi Arabia cuts prices for Asian buyers, intensifying worries about demand

• Oil prices fell around 1% on Monday after Saudi Arabia cut prices for the Asian market.
• The move sparked concerns about demand in Asia, where the Delta variant is hitting economies.
• Investors also worried about the slowdown in the US labor market recovery in August.

Oil prices fell on Monday after Saudi Arabia cut prices for the Asian market by more than expected, intensifying concerns about weak demand from the impact of the Delta coronavirus variant.

Brent crude oil fell as much as 1.4% to $71.51 before paring its losses. It stood 0.66% lower at $72.13 in thin morning trading in Europe.

Saudi Aramco, the kingdom's state-owned oil company, told Asian customers on Sunday it will cut October's official selling prices by at least $1 a barrel, according to Reuters. The cuts, which apply to all crude grades delivered to the region, were considerably bigger than expected.

"Evidently Saudi Arabia had overestimated the strength of oil demand in Asia a month ago and has now been forced to backpedal," said Commerzbank analyst Carsten Fritsch in a note on Monday.

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The Organization of the Petroleum Exporting Countries and its allies are currently raising output after slashing production to support prices during the pandemic-induced economic crash of 2020. Oil prices have risen sharply since the start of the year, as growth has boomed in advanced economies.

Yet the spread of the Delta coronavirus variant and global supply-chain problems are now dragging on a return to economic normality. This was seen clearly on Friday, when data showed that US nonfarm payrolls rose at their slowest in seven months in August as the jobs recovery stuttered.

Delta variant cases have caused particular concern in Asia, leading China to limit activity at some ports, further snarling up supply chains. Concerns have grown that these factors will dampen demand for oil.

Bjarne Schieldrop, chief commodities analyst at SEB, said Brent crude is likely to fall back to around $63 a barrel in 2022, as COVID variants hamper the demand recovery and OPEC+ and other oil producers increase supply.

WTI crude, the US benchmark, also fell as much as 1.4% on Monday before paring its losses, although trading was thinner due to the Labor Day holiday. It stood 0.66% lower at $68.83 in European trading.