Oil’s slump deepens as new virus strain threatens fuel demand

Oil extended this week’s slump on fears that rising virus infections and a faster-spreading strain will inflict a new blow on fuel consumption.

Futures are down more than three per cent in New York since Friday’s close. Many countries have suspended travel with the U.K., where a new COVID-19 variant is forcing more than 16 million people to stay at home. A resurgence of the virus gathered pace in Asia, with Taiwan recording its first locally transmitted infection since April and a cluster of cases swelling in Sydney.

“With much of Europe back in lockdown, the prospect of a speedy return to normality is fading,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “The market has been preoccupied with positioning itself for a recovery in fuel demand in 2021. But with the latest virus strain, expectations may become more muted and prices see a further retracement.”

Prices are also under pressure after Russia said it will support a further production increase by the OPEC+ coalition in February when the group meets early next month. The 23-nation alliance is gradually restoring the output it halted during the worst period of the pandemic. A stronger dollar is also reducing the appeal of oil, which is priced in the currency.

Prices

  • West Texas Intermediate for February delivery dropped 1.3% to $47.34 a barrel on the New York Mercantile Exchange as of 10:35 a.m. in London
  • The January contract fell $1.36 when it expired Monday
  • Brent for February dropped 0.9 per cent to $50.43 on the ICE Futures Europe exchange after closing down 2.6 per cent on Monday

Crude has surged more than 30 per cent since the end of October, in part due to a series of vaccine breakthroughs. The threat to demand from additional stay-at-home measures is rippling across oil markets, pushing Brent contracts for prompt delivery back into a discount against later deliveries –– a bearish pattern known as contango.

“The new strain of the virus is the straw that broke the camel’s back,” said Howie Lee, an economist at Oversea-Chinese Banking Corp.

© 2020 Bloomberg L.P.

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