Oil drops below $48 on alarm over virus mutation and lockdown risks
Oil fell below $48 a barrel in Asian trading — after posting a seventh weekly gain — on concern a mutation of Covid-19 discovered in the UK could speed transmission of the virus and lead to more lockdowns.
Futures in New York dropped 3% after closing at the highest in almost 10 months on Friday. More than 16-million Britons are now required to stay at home as a full lockdown came into force in London and the southeast of England, with many countries limiting travel with the UK. A stronger dollar also reduced the appeal of commodities that are priced in the currency.
The mutation comes as vaccines are being rolled out in several countries and as the US prepares to vote on a stimulus plan. Congressional leaders reached a deal on a roughly $900bn spending package to bolster the US economy, giving legislators a short timetable to review and pass what would be the second-biggest economic-rescue measure in the nation’s history.
Crude has rallied about 33% since the end of October on a series of vaccine breakthroughs that have created expectations for a recovery in energy demand in 2021. In the short term, however, prices are being buffeted by the fast-spreading virus leading to more stay-at-home orders.
“We have quite a bit of speculative money in oil at the moment, attracted by the more constructive outlook for 2021,” said Warren Patterson, head of commodities strategy at ING. “However, if we start seeing the virus mutating, I imagine some of these speculators will become a bit more skittish.”
Oil is a vaccine trade right now with robust demand seen in the second half of 2021 as more people resume flying, Jeff Currie, the head of commodities research at Goldman Sachs, said in a Bloomberg television interview on Friday. That’s when Opec+ can return more supplies to the market, he said.
The alliance will react faster to changes and take a more hands-on approach with the oil market, thanks to its accelerated schedule of monthly meetings, Russia and Saudi Arabia, the group’s leaders, said over the weekend.
Oil’s futures curve is reflecting the conflicting long- and short-term signals. Brent’s prompt timespread is 4c a barrel in contango, a bearish signal where near-dated contracts are cheaper than later-dated ones. The spread was as much as 13c in backwardation earlier in December.
“Rising infection rates and the institution of lockdown measures are starting to have an affect on sentiment,” said Michael McCarthy, chief markets strategist at CMC Markets Asia Pacific. He said he was a “little surprised” the market was so negative given the progress on the US stimulus plan.
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