The black liquid benchmarks had one of their worst weekly performances last week with both contracts losing over $10 a barrel on Friday, representing their largest one-day drop since April 2020.
Both benchmarks were set to reverse their four-week losing streak, posting over 3% gain as at mid-week. However, a new variant of the coronavirus, which is reportedly vaccine-resistant, caused panic selling of the black liquid.
Also, adding to the selling pressure is the coordinated release of oil reverse to the public, orchestrated by the United States. Earlier in the week, the U.S. Department of Energy announced the release of 50 million barrels of crude oil from the Strategic Petroleum Reserve (SPR).
What you should know
The global benchmark, the Brent crude closed the week down 7.82%, currently trading $72.72 a barrel, after losing 11.55% on Friday. The United States benchmark, the West Texas Intermediate (WTI) crude, for the week, dropped by 10.45%, currently trading $68.15 a barrel, after losing 13.1% on Friday.
The World Health Organization has designated the new variant, named ‘Omicron’, as “of concern”, according to the South African health minister. This caused developed economies to quickly enact travel restrictions. The United States, Canada, Britain, Guatemala and European countries are among those to restrict travel from Southern Africa, where the variant was first detected.
Another factor affecting the price of oil is the release of SPR. So far, China, India and the United Kingdom, all joined the United States in this attack on rising oil prices. Japan and South Korea also announced that they are joining the U.S. in this crusade.
The oil market is not the only market to sell off as global equities markets also followed suit. The Dow Jones Industrial Average ended the trading session down by 2.53% with its basis points at 34,899.34. This decline represents the indexes largest percentage drop in more than a year. European stocks also saw their biggest sell-off in 17 months as the FTSE 100 lost 3.64%, with its basis point currently trading 7,044.03.
What they are saying
An Organization of Petroleum Exporting Countries and its allies (OPEC+) source told Reuters that the cartel is monitoring developments around the variant, with some expressing concern that it may worsen the oil market outlook less than a week before a meeting to set policy.
Scientists have so far only detected the Omicron variant in relatively small numbers, mainly in South Africa but also in Botswana, Hong Kong and Israel, but they are concerned by its high number of mutations which could make it vaccine-resistant and more transmissible.
Bob Yawger, director of energy futures at Mizuho stated, “The market is factoring in a worst-case scenario situation in which this variant causes massive demand destruction.” He also explained that news of the variant caused ructions in a market previously caught between producer and consumer nations.
Craig Erlam, senior market analyst at OANDA stated, “The biggest fear is that it will be resistant to vaccines and be a massive setback for countries that have reaped the benefits from their rollouts.”
Drugmakers Pfizer and BioNTech stated that if necessary, they would be able to redesign their shot within 6 weeks and ship initial batches within 100 days.
South Africa’s foreign ministry said it would speak to Britain to try to get it to reconsider its travel ban. Foreign Minister, Naledi Pandor said in a statement that, “Our immediate concern is the damage that this decision will cause to both the tourism industries and businesses of both countries.”
With the markets selling off on Friday, many are looking towards the next OPEC+ meeting to gauge the possible direction the cartel will take. PVM analyst Tamas Varga stated, “OPEC’s initial assessment of the co-ordinated (stockpile) release and the sudden appearance of a new variant of the coronavirus raises serious concerns about economic growth and the oil balance in coming months.”