Oil plunges by the most since April 2020 after new Covid variant heightens fears over global demand outlook

Oil pumps at sunset, industrial oil pumps equipment.
  • Oil fell the most since April 2020 on Friday, as investors ditched riskier assets after the emergence of a new Covid variant.
  • Both Brent and WTI futures were heading for their largest one-day fall since late April last year.
  • “We can very, very quickly go from a very tight market to an oversupplied market,” Saxo Bank’s Ole Hansen said.

The discovery of a new, and possibly more contagious, variant of Covid-19 sent oil plunging on Friday by the most since the depths of the coronavirus crisis last year, when crude prices fell below zero for the first time, as investors fretted about the impact to energy demand.

Oil prices were already heading for a weekly loss, after the United States released some crude from its Strategic Petroleum Reserve to try to temper sky-high energy prices.

But after South African scientists said they had detected small numbers of a new variant of COVID-19 that could prove more transmissible, investors dumped crude oil futures and equities on Friday in favor of perceived safe-haven assets.

The variant — called B.1.1.529 — has a “very unusual constellation” of mutations, meaning the body’s immune response may not kick in and vaccines may be less effective against it, scientists told reporters at a news conference, according to Reuters. The World Health Organization has called a special meeting Friday to discuss the new variant.

The UK banned flights from six African countries in response, underlining worries about the impact of the new variant on economic growth. In recent weeks, Europe was the focus of concern as COVID-19 cases surged, leading to lockdowns and restrictions in Austria, Italy and other countries. Earlier this week, the WHO warned the coronavirus could claim another 700,000 victims by March. 

Brent crude futures were last down 10.5% on the day at $US73.50 ($AU103) a barrel at 11:15 a.m. ET, set for their biggest one-day fall since late April 2020, when US crude prices tumbled into negative territory, while West Texas Intermediate crude dropped 11.9% $US69.20 ($AU97) a barrel. 

“The SPR release we had earlier in the week was a small factor. But what really could have an impact is if we start to see another lockdown and thereby see demand getting hurt, because we can very, very quickly go from a very tight market to an oversupplied market,” Saxo Bank commodities strategist Ole Hansen said on the bank’s daily podcast Friday.

“It just makes it that much more difficult for OPEC+ when they meet next Thursday,” Hansen added.

A number of other countries aside from the US are considering freeing up some strategic inventory of their own. 

But the Organization of the Petroleum Exporting Countries and its partners, such as Russia and Oman, have been wary of stepping up coordinated output increases, given that market watchers widely expect an overhang of unwanted fuel to develop next year. 

The group of major oil producers, which meets next week to discuss supply policy, has agreed to raise crude production by a joint 400,000 barrels a day a month. But given OPEC itself is highly cautious on the demand outlook, it’s unlikely to increase the pace, especially now in light of a new variant that could threaten activity such as air travel. 

Commerzbank noted that OPEC’s advisory board believes the surplus could grow in February to as much as 3.7 million barrels a day.

“This could prompt OPEC+ at its meeting next week to decide not to step up its oil production any further in January and to consider expanding supply by a smaller amount in the months thereafter,” strategist Carsten Fritsch said in a note.