Oil plunges with virus mutation raising lockdown risks

Oil plummeted the most in seven weeks, with investors fleeing the market as a mutation of Covid-19 discovered in the U.K. threatened more lockdowns across Europe.

Brent futures earlier slumped below $50 a barrel, at one stage falling almost six per cent. More than 16 million Britons are now required to stay at home after a full lockdown came into force in London and the southeast of England. Some European countries are limiting travel with the U.K. and France halted freight movements to England for 48 hours.

That’s feeding concerns that a new wave of movement restrictions could come into effect across the region, curbing a recovery in global consumption. A stronger dollar also reduced the appeal of commodities such as oil that are priced in the currency.

Meanwhile, physical oil prices are cooling as Asian refiners ease purchases after an earlier-than-usual buying spree. Abu Dhabi’s Murban crude was sold last week on the spot market below its official price for the first time since August, while differentials for Russia’s ESPO and Urals have also slumped. The structure of the futures curve weakened Monday, indicating supply concerns.

Crude has rallied by almost a third since the end of October on a series of vaccine breakthroughs that boosted expectations for a recovery in energy demand next year. In the short term, however, prices are being buffeted as the fast-spreading virus leads to more stay-at-home orders.

“Oil prices are wilting amid fears that the new strain will derail the fuel demand recovery,” said PVM Oil Associates analyst Stephen Brennock. “If anything, it reaffirms that the path toward demand normalization is anything but smooth.”

Prices

  • Brent for February settlement dropped four per cent to $50.22 a barrel at 1:46 p.m. in London. It closed up 1.5 per cent on Friday
  • Trading volumes on the Brent benchmark were more than double the average for the time of day over the last 10 days
  • West Texas Intermediate for January delivery, which expires Monday, also fell four per cent to $47.15 a barrel

OPEC+ will react faster to changes and take a more hands-on approach with the oil market thanks to its accelerated schedule of monthly meetings. Russia intends to support a further increase in OPEC+ production at the group’s meeting next month. The country is said to favour an increase of 500,000 barrels a day, the maximum supply increase allowed by the accord that emerged from the group’s talks in December.

Money managers continued to add bullish bets to the oil market last week. Speculators were the most optimistic on the global Brent benchmark since February in the week through Dec. 15.

“We have quite a bit of speculative money in oil at the moment, attracted by the more constructive outlook for 2021,” said Warren Patterson, head of commodities strategy at ING Groep NV. “However, if we start seeing the virus mutating, I imagine some of these speculators will become a bit more skittish.”

© 2020 Bloomberg L.P.

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