Oil was poised for its first weekly loss since October as the discovery of a potentially faster-spreading variant of Covid-19 in the U.K. raised the risk of more demand-sapping lockdowns.
Brent futures were flat near $51 a barrel on Thursday, but are down almost two per cent this week. Tougher restrictions were extended to much of England in an effort to contain a new strain of COVID-19 and rein in rapidly rising infection rates. Early analysis from scientists and governments around the world suggests the variant may be as much as 70% more transmissible.
A decline in U.S. crude inventories injected some optimism into the market, helping U.S. futures to finish 2.3% higher on Wednesday. Dollar weakness is also boosting the appeal of commodities priced in the currency, while the U.K. and European Union are set to unveil a post-Brexit trade agreement.
“There are still opposing forces at work at the moment,” UBS Group AG analyst Giovanni Staunovo said. Mobility restrictions in Europe are weighing on oil demand, but the oil market is still in deficit as a result of the OPEC+ cuts this year. “In that sense, the road to higher oil demand and prices will remain bumpy also over the coming weeks.”
U.S. President Donald Trump raised geopolitical tensions in the Middle East, accusing Iran of being responsible for a rocket attack near the U.S. embassy in Baghdad on Sunday. “Some friendly health advice to Iran: If one American is killed, I will hold Iran responsible. Think it over,” he said in a tweet.
The Islamic Republic’s Foreign Ministry said the claims were baseless. The country’s oil minister said last week that Iran was planning to double its production in 2021, which will clash with OPEC+ efforts to gradually increase supply without flooding the market.
Despite Trump’s term nearing an end, “as president he can still keep pressure elevated in the region until the last day,” Staunovo said.
Oil is closing out the year on a more somber note after a run of seven weekly gains driven by euphoria over a series of vaccine breakthroughs. The new strain and the realization that vaccines will take some time to be rolled out have worsened the short-term outlook, while the OPEC+ alliance is poised to add 500,000 barrels a day of production in January.
- West Texas Intermediate for February delivery was flat at $47.95 a barrel on the New York Mercantile Exchange as of 9:57 a.m. in London.
- Front-month futures are down 2.3 per cent this week.
- Brent for February settlement dropped 0.3 per cent to $51.05 on the ICE Futures Europe exchange after closing up 2.2% on Wednesday.
Neither WTI nor Brent will trade on Friday due to the Christmas holiday.
There’s also a risk that the recent price rally leads to non-OPEC+ production coming back prematurely. Drilling rigs targeting crude oil in the U.S. rose by 1 to 264 last week, the fifth straight increase and the highest level since May 8, according to oilfield services provider Baker Hughes.
Russia’s western ports, meanwhile, will push out more crude than at any time in the past nine months in January, a sign the nation intends to make use of higher OPEC+ production targets that come into force in the new year.
Oil’s futures curve has also weakened. Brent’s prompt timespread is 4 cents a barrel in contango, a bearish market structure where near-term prices are more cheaper than later-dated ones. It was as much as 13 cents in backwardation earlier in the month.
© 2020 Bloomberg L.P.