Oil resumes slump as Omicron variant sows fears over demand

Oil resumed its slide after Monday’s rebound as fears that the omicron variant may resist vaccines sent risk assets tumbling.

West Texas Intermediate futures fell 2.2 per cent as part of a broader retreat among commodities and equities as a top drugmaker reiterated warnings that the new strain could withstand existing inoculations. Brent crude also tumbled, with the price structure of the global benchmark crumbling as underlying fundamentals came under pressure. 

Moderna Inc. chief executive officer Stephane Bancel said the world may now need new vaccines as current shots won’t provide the same level of protection against omicron as they do against delta, according to an interview with the Financial Times.

 Oil has slumped almost 20 per cent in November, set for the biggest monthly loss since March 2020, when the onset of the pandemic crushed global consumption. Investors are now seeking clues about the challenge posed by the omicron variant and how producers will respond. The Organization of Petroleum Exporting Countries and its allies will decide Thursday whether to pause a run of monthly supply hikes.

“There is elevated uncertainty on how omicron impacts oil demand, which is likely to keep oil prices volatile over the coming weeks,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.

The weakness has hit the forward price structure for Brent that traders look to for clues on supply-demand.

Brent for January supply is poised to expire in a so-called contango on Tuesday, meaning that the most immediate price is lower than the following month. That’s a sign that expectations for short-term tightness have dissipated since the variant emerged in South Africa.

While expiry-day pricing is often highly volatile, the wider forward curve has also weakened noticeably, giving traders seeking yield by holding long positions less incentive to be invested. While much of the curve remains backwardated -- where nearer-term prices trade above longer-dated ones -- gaps between monthly contracts have narrowed. 

The Biden administration said on Monday that it would proceed with a plan to draw 50 million barrels of oil from strategic reserves despite the recent drop in prices and warned it could release even more onto the market. The move was made in coordination with other crude-consuming nations, including Japan.

Prices

  • WTI for January delivery fell 2.2 per cent to $68.38 a barrel on the New York Mercantile Exchange at 12:30 p.m. London time.
  • Brent for January settlement sank 2.7 per cent to $71.45 a barrel on the ICE Futures Europe exchange. The contract expires Tuesday.

Oil traders are also tracking talks this week aimed at reviving Iran’s 2015 nuclear deal with world powers. Success at the negotiations in Vienna could lift sanctions on Iran’s economy, leading to a resumption in official oil flows. The exchanges began positively on Monday, according to a top European diplomat.

Macro-economic data from Asia pointed to improvements in leading economies, a positive signal for energy demand. In China, the manufacturing purchasing managers index returned to expansion, while factory output in Japan edged up.

© 2021 Bloomberg L.P.

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