Oil crashed more than 10% in both London and New York as a new coronavirus strain sparked fears that renewed lockdowns will threaten the global recovery in demand.
Both benchmarks tumbled on Friday with the emergence of the new variant representing the biggest threat to the recovery in oil consumption in several months, with a World Health Organization panel set to discuss the variant later. Global markets sold off heavily, as traders fled to haven assets.
The price plunge is the latest dramatic twist ahead of a key OPEC+ meeting next week. After an alliance of consumers announced the release of emergency supply earlier this week, the potential severity of the new coronavirus variant is the latest factor that the group will have to tackle when deciding whether to lift output.
OPEC+ could choose to pause its current planned output hike of 400,000 barrels a day or even cut output, according to UBS Group AG. The group will have to consider internal projections, published before the news of the variant broke, that showed an expected surplus early next year.
“It’s a sign the market got carried away from itself and that we still remain very vulnerable to Covid-19,” said John Kilduff, founding partner at Again Capital LLC.
So far, several countries have halted travel from southern Africa in a bid to stop its spread. Of particular concern was the large number of mutations in the spike protein of the virus, which plays a key role on its entry into the body. Researchers are still trying to determine whether it is more transmissible or more lethal than previous strains.
“This is a huge overreaction in terms of the market,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. said in a Bloomberg Television interview. “This is the market pricing in the worst possible scenarios.”
OPEC+ had already said it would reconsider a potential output increase if consumers went ahead with the reserve release announced earlier this week. Now it will also have to consider just how severe the impact of the new variant could be on the market.
The International Energy Agency said earlier this week that OPEC+ is creating artificial tightness in the market, while the co-ordinated SPR release by consumers was the clearest signal yet of their disquiet at high prices.
As well as the decline in headline prices, crude traders were also watching several other notable shifts in the market on Friday. WTI fell below its 100-day moving average for the first time since September, a potential sign of technical weakness. At the same time the extreme pressure on the U.S. benchmark meant its discount to Brent expanded to its widest since May 2020 at one point.
The picture wasn’t much brighter in oil product markets either — the area most directly affected by end-user demand. Diesel prices were plunging, led by Asia, as the market began to price in a potential renewed hit to economic growth.
“The only thing we can conclude definitely is that market confidence is fragile,” said Paul Horseless, head of commodities research at Standard Chartered. “The Friday after Thanksgiving, with all markets down and just before a WHO announcement, probably isn’t the time to be brave.”