Threat of new European lockdowns send oil prices tumbling

Oil was on track to post its biggest weekly drop since August as Europe’s worsening Covid-19 crisis renewed the prospect of lockdowns just as key consuming nations look to add emergency supply to the market.

 

The January futures contract in New York tumbled as much as 4.2% on the 19th November. Brent fell as much as 3.9%. The wave of infections in Europe is growing, once again raising the prospect of restrictions on mobility and a hit to oil demand. Austria imposed a lockdown while Germany introduced some restrictions. Both benchmarks are also set to decline for the fourth straight week.

 

The concerns come as the oil market fixates on the prospect of a combined release from strategic crude reserves by the US and China. The latter said the 18th November it was working on one, while the US has repeatedly said the option to tap its Strategic Petroleum Reserves remains on the table.

 

“It’s a potent one-two punch for the petroleum complex, when there is a looming supply burst combined with a hit to demand from the virus,” said John Kilduff, founding partner at Again Capital LLC.

 

After rising to the highest in seven years, oil has faltered over the past month even as the Organisation of Petroleum Exporting Countries and its allies stuck with a cautious approach to restoring output. Alarmed by surging gasoline costs, President Biden tried and failed to get the OPEC+ group to deliver more crude and then pivoted to a possible release from America’s Strategic Petroleum Reserve. A potential weakness in China’s economy has also contributed to the bearish factors.

 

“The risk is real in Europe, especially if Austria’s move to lockdown has a domino effect across the continent,” said Louise Dickson, Rystad Energy’s senior oil markets analyst.

 

The rout also extended into refined product markets. Benchmark US gasoline futures and the US crack spread, a reflection of refining margins, slumped more than 3% each. Europe’s diesel crack also fell sharply.

 

 

Prices:

  • Brent fell 3.2% to US$78.66 a barrel at 1:08 pm in New York

 

  • WTI for January delivery lost 3.2% to US$75.88

 

  • The December contract, which expired on the 19th November, was at US$76.24

 

The sell-off slowed briefly after German foreign minister ruled out a general national lockdown. At the same time, the impact on currencies has pushed the dollar higher making commodities priced in the currency more expensive.

 

Some traders are also still placing bullish bets in the options markets, despite the recent selloff in prices. Contracts that would profit a buyer from a rally toward US$200 traded on the 18th November for the second consecutive week. While relatively cheap, such bets protect against a potential spike in prices.

 

Source: WorldOil