Oil prices tumbled to the lowest level in more than two months Friday 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 Dow futures dropping more than 800 points. The World Health Organization warned Thursday of a new Covid variant detected in South Africa. It could potentially be more resistance to vaccines thanks to its mutations, although the WHO said further investigation is needed.
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 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’s slowly eased the historic output cuts it agreed to in April 2020 as the coronavirus sapped demand for petroleum products, restoring 400,000 barrels per day of oil 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 $10 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.