Oil resumes drop as COVID-19 and supply concerns weigh

Oil dropped towards $68 a barrel on Tuesday, extending the previous session's steep slide, pressured by concern that rising COVID-19 infections could weaken demand again just when OPEC+ is increasing supply.

Monday's selloff had pushed oil to a two-month low and hit other riskier assets. While equities avoided a new selloff on Tuesday, U.S. Treasury and German bond yields also slipped as a reminder that investors remained worried.

"As things stand, it is hard to see prices staging a comeback unless virus jitters are brought back under control," said Stephen Brennock of oil broker PVM.

"The market is clearly unsettled about the demand outlook."

Brent crude fell 23 cents, or 0.3%, to $68.39 a barrel by 1353 GMT, having slid by 6.8% on Monday. U.S. crude for August , which expires later on Tuesday, was down by $1.19, or 1.8%, at $65.23 after falling 7.5% on Monday. The September U.S. crude contract was down 1.6% at $65.31.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, agreed on Sunday to increase output from August, unwinding more of the supply curbs put in place when the pandemic struck last year.

The Delta coronavirus variant is now the dominant strain worldwide, U.S. officials said on Friday.

Still, Julius Baer analyst Carsten Menke said it was unlikely to jeopardise the recovery of global growth, though it could cause "regional hiccups".

The coronavirus concerns outweighed support from tight oil supply in the near term. Crude inventories in the United States are expected to fall for a ninth week. OPEC, meanwhile, expects global oil demand to grow by 6.6% in 2021.

"Global demand still appears to be recovering dynamically, so the oil market should end up in supply deficit in the coming months despite the production hikes to be implemented by OPEC+," said Eugen Weinberg of Commerzbank.

(Additional reporting by Aaron Sheldrick Editing by David Evans and David Goodman)

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