Covid Variant Sends Oil Into Tailspin

Oil futures plunged in early trading Friday, with global benchmark Brent crude down 7.1% as both major global benchmarks crashed through key support levels as a potentially more dangerous variant of the Covid-19 pandemic emerged.

In London, Brent crude for January delivery was down $5.85 at $76.37.

In New York, January West Texas Intermediate (WTI) on Nymex was trading $6.40 lower at $71.99.

Both Brent and WTI made short work of three key support levels, with Brian LaRose of Icap noting that the path toward lower prices is now open from a technical perspective.

Oil products markets were also a bloodbath. Nymex December gasoline was down a whopping 18.98¢ at $2.1299 per gallon, with the diesel contract down 20.31¢ at $2.1799/gallon.

Broader markets were deep in negative territory as well, with equities selling off hard and risk sentiment evaporating.

Traders and market watchers pegged the blame squarely on a new Covid-19 variant that has emerged in southern Africa and shows signs of being more transmissible and difficult for the immune system to fight off.

“Although there has only been a very limited number of cases of the B.1.1.529 variant, it has been described as 'the worst variant we've seen so far' by experts,” said Fawad Razaqzada of ThinkMarkets. “There is concern it has the potential to evade immunity and the UK has already put several southern African countries on its travel red list. Fears that more countries will introduce fresh lockdowns and travel restrictions has hurt crude oil.”

The new variant has thrown forecasts of fundamentals into disarray, some traders said, overshadowing recent news of releases from strategic stocks and concerns over Opec and its allies’ response.

“The coronavirus is overwriting even the most pessimistic forecast on the immediate oil balance,” said Tamas Varga of oil brokerage PVM, adding that this new variant could add to volatility. “The initial reaction clearly implies that a new layer of uncertainty surfaced, and its longer-term impact is anything but unambiguous.”

The timing of the variant’s emergence and detection may have exacerbated the downward move, some traders said.

“We may be running ahead of ourselves on the variant, but it’s light trading volumes” given the US holiday, said Phil Flynn of Chicago’s Price Futures Group.

He also noted that a post-Thanksgiving sell-off has emerged as an almost routine move in recent years.