Oil drops 13%, breaks below $70 as new Covid variant sparks global demand concerns
Oil posted its worst day of the year on Friday, tumbling to the lowest level in more than two months as the new Covid-19 strain sparked fears about a demand slowdown just as supply increases.
The leg lower came amid a broad sell-off in the market with the Dow dropping more than 900 points. The World Health Organization warned Thursday of a new Covid variant detected in South Africa. It could be more resistant to vaccines thanks to its mutations, although the WHO said further investigation is needed.
U.S. oil settled 13.06%, or $10.24, lower at $68.15 per barrel, falling below the key $70 level. It was the contract’s worst day since April 2020. WTI also closed below its 200-day moving average — a key technical indicator — for the first time since November 2020.
International benchmark Brent crude futures slid 11.55% to settle at $72.72 per barrel.
Both contracts registered their fifth straight week of losses for the longest weekly losing streak since March 2020.
A decrease in travel and potential new lockdowns, both of which could hit demand, come just as supply is about to increase.
“It appears that the discovery of a Covid-19 variant in southern Africa is spooking markets across the board. Germany is already limiting travel from several nations in the affected region,” said John Kilduff, partner at Again Capital. “The last thing that the oil complex needs is another threat to the air travel recovery,” he added.
On Tuesday the Biden Administration announced plans to release 50 million barrels of oil from the Strategic Petroleum Reserve. The move is part of a global effort by energy-consuming nations to calm 2021′s rapid rise in fuel prices. India, China, Japan, South Korea and the U.K. will also release some of their reserves.
“This [the sell-off] is attributable to concerns about a sizeable oversupply in early 2022 that is set to be brought about by the upcoming release of strategic oil reserves in the US and other major consumer countries, plus the ongoing steep rise in new coronavirus cases,” noted analysts at Commerzbank. “Furthermore, an even more transmissible variant of the virus has been discovered in South Africa, prompting a noticeable increase in risk aversion on the financial markets today.”
OPEC and its oil-producing allies are set to meet on Dec. 2 to discuss production policy for January and beyond. The group has slowly eased the historic output cuts it agreed to in April 2020 as the coronavirus sapped demand for petroleum products. Since August the group, known as OPEC+, has returned 400,000 barrels per day to the market each month.
The group has maintained its gradual taper despite calls from the White House and others to hike output as oil prices surged to multi-year highs. West Texas Intermediate crude futures hit a seven-year high in October, while Brent rose to a three-year high.
U.S. oil is now down more than $15 since its October high of $85.41.
“The coordinated SPR release is getting a second look, as well, especially with OPEC decrying it and asserting that the release will tip the global market back into surplus. The release is much more than just a drop in the bucket,” added Kilduff.
Energy stocks followed oil lower on Friday, and the group was the worst-performing S&P 500 sector, falling more than 4%. Devon Energy, APA and Occidental were among the biggest losers.
