Market

Oil plunges 11% as new COVID variant sparks shutdown fears

Oil futures were slammed to 11-week lows on Friday, pushing the U.S. benchmark back below the $70-a-barrel threshold on Friday after the discovery in South Africa of a new variant of the coronavirus that causes COVID-19.

Traders dumped oil after the U.S. holiday on Thursday, trading on fears potential lockdowns and other restrictions on business and consumer activity could hit fuel demand as a result of the new coronavirus variant. Analysts also weighed whether the move could prompt the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to slow planned production increases when members meet next week.

West Texas Intermediate crude for January delivery 
CL00,
-11.70%

CLF22,
-11.70%

fell $9.16, or 11.7%, to $69.22 a barrel, trading below the 200-day moving average, a marker of an asset’s long-term trend, for a most actively traded contract for the first time since Nov. 2, 2020.

Trading volume was expected to be light, amplifying price swings, in a shortened session on the heels of the U.S. Thanksgiving Day holiday. Trading in oil futures will close an hour early at 1:30 p.m. Eastern.

January Brent crude 
BRNF22,
-9.99%
,
 the global benchmark, fell $8.50, or 10.3%, to $73.72 a barrel on ICE Futures Europe. The Friday selloff sent both WTI and Brent to levels last seen on Sept. 10.

Oil’s fall, along with sharp losses for U.S. stocks and Asian equities, came after the discovery of a new coronavirus variant with a high level of mutations in South Africa, which has been experiencing a massive spike in cases in recent days. Investors poured money into gold
GC00,
+0.07%
,
Treasurys
TMUBMUSD10Y,
1.506%

and other perceived havens such as the Japanese yen
USDJPY,
-1.74%
.

Some analysts saw the selloff as overdone.

“Traders are putting the fear of this new strain ahead of the reality. While we have to take it seriously, oil should find a floor in the $72 area,” said Phil Flynn, analyst at Price Futures Group, in a note.

“The worries are still that U.S. volume today will be light but the markets look to be ahead of the risk even though we are not even close to understanding how bad this new variant might be,” he said.

Presently known as B.1.1.529, the variant had also been detected in Botswana and Hong Kong in travelers who had visited South Africa. The World Health Organization is holding an emergency meeting on Friday to assess the variant, which scientists aren’t sure is more deadly or to what degree it might be more easily transmissible.

Read: World takes action as new coronavirus variant emerges in southern Africa

But scientists say it is the most heavily mutated variant so far, which could make it more transmissible than the delta variant which plagued the U.S. and Europe in the summer and autumn.

Already countries were taking precautionary measures, with the U.K. halting travelers from South Africa and five other nations from Friday. The variant shock comes as Europe has been battling a spike in cases across many countries, such as the economic powerhouse Germany. Austria has locked down its population, while other countries are also rolling out restrictions.

“Depending on how this virus-led selloff evolves, and how concerned the WHO is of it, the calculations surrounding the OPEC+ meeting next week could change,” said Jeffrey Halley, senior market analyst at OANDA.

“OPEC+ has stated repeatedly that one area of caution was the resurgence of COVID-19 eroding oil demand as the grouping raises production,” he told clients in a note. Halley added that OPEC+ is likely to not increase production above its previously agreed 400,000 bpd target next week, “unless the market situation really deteriorates next week, and oil prices experience a much deeper slump.”

Traders have been questioning whether Organization of the Petroleum Exporting Countries and its allies — called OPEC+, will decide next week to scrap those output increases after a coordinated release of strategic reserves by several countries, including the U.S.

The cartel and its allies has previously pushed back against requests by the Biden administration and others to speed up production increases. OPEC+ has boosted output in monthly increments of 400,000 barrels a day as it unwinds earlier production cuts.

Natural-gas futures rose, with the January contract
NG00,
+3.85%

NGF22,
+3.85%

up 2.5% at $5.241 per million British thermal units.

December gasoline
RBZ21,
-11.35%

fell 11.6% to $2.0497 a gallon, while December heating oil
HOZ21,
-10.55%

dropped 11.5% to $2.1066 a gallon.

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