Brent oil sheds almost $5 as new COVID-19 variant roils markets

Oil fell sharply as a new COVID-19 strain raised concerns about the outlook for demand and sent global markets spiraling.

Futures in New York tumbled below $74 a barrel and benchmark Brent shed as much as six per cent, the most since July. The emergence of the new strain represents the biggest threat to the recovery in oil consumption for several months, with a World Health Organization panel set to discuss the variant later. Global markets sold off heavily, as traders fled to haven assets.

The price plunge is the latest dramatic twist ahead of a key OPEC+ meeting next week. While the gathering was already set to be keenly-watched, after an alliance of consumers announced the release of emergency supply earlier this week, the potential severity of the new Covid variant is the latest turbulent factor that the group will have to tackle when deciding whether to lift output.

“The only thing we can conclude definitely is that market confidence is fragile,” said Paul Horsnell, head of commodities research at Standard Chartered. “The Friday after Thanksgiving, with all markets down and just before a WHO announcement, probably isn’t the time to be brave.”

OPEC+ could choose to pause its current planned output hike of 400,000 barrels a day or even cut output, according to UBS Group AG. The group will have to consider internal projections, published before the news of the variant broke, that showed an expected surplus early next year. 

It comes amid rapidly growing political pressure on the group. The International Energy Agency said earlier this week that OPEC+ is creating artificial tightness in the market, while the co-ordinated SPR release by consumers was the clearest signal yet of their disquiet at high prices.

Prices

  • West Texas Intermediate for January fell as much as 7.4 per cent to $72.60 a barrel from Wednesday’s close and was at $73.70 at 8:04 a.m. New York time.
  • There was no settlement Thursday due to the Thanksgiving holiday and all transactions will be booked Friday.
  • Brent for January settlement tumbled as much as six per cent to $77.25 a barrel on the ICE Futures Europe exchange.

OPEC+ had already said it would reconsider a potential output increase if consumers went ahead with the reserve release announced earlier this week. Now it will also have to consider just how severe the impact of the new variant could be on the market. 

So far, several countries have halted travel from southern Africa in a bid to halt its spread. Of particular concern was the large number of mutations in the spike protein of the virus, which plays a key role on its entry into the body. Researchers are still trying to determine whether it is more transmissible or more lethal than previous strains.

As well as the fall in headline prices, crude traders were also watching several other notable shifts in the market on Friday. WTI fell below its 100-day moving average for the first time since September, a potential sign of technical weakness. At the same time the extreme pressure on the U.S. benchmark meant its discount to Brent expanded to its widest since May 2020 at one point. 

The picture wasn’t much brighter in oil product markets either – the area most directly affected by end-user demand. Diesel prices were plunging, led by Asia, as the market began to price in a potential renewed hit to economic growth.

© 2021 Bloomberg L.P.

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