Stock markets and commodities markets sold off hard on Friday due to a new coronavirus variant identified in South Africa. The selling intensified with some countries including the UK, Singapore and Israel curbing travel from South Africa and other neighboring countries. We had seen a dead cat bounce in WTI and Brent after the SPR coordinated release plans.
The new COVID-19 variant contains significantly more mutations than others raised concerns of further lockdowns and travel restrictions that could weigh heavily on a fragile global economic recovery. Selling accelerated after the EU Agency named the new COVID strain a ‘variant of concern’.
West Texas Intermediate oil, the U.S. benchmark, closed 13% lower, the biggest decline since April 2020. Brent crude slumped 12%. At the lows WTI futures were down 14% from its pre-Thanksgiving close and London’s Brent collapsed over12%. By the close they’d both recovered slightly, but for Brent it was still the seventh worst one-day drop in history.
Oil had been rising through the year as economic life gradually recovered from the pandemic. OPEC+ had been keeping a tight handle on supply and many ESG policies had seen production and supplies dwindle. The leader of thios was US President Biden who has been banning new production on state land and shutting down pipelines amongst other shaming measures. He has been desperate to seek blame elsewhere to bring prices down.
President Biden in his latest shift of finding blame and solutions for high oil prices last Wednesday sent a letter to the FTC to consider whether “illegal conduct” by large oil and gas companies is pushing up gasoline prices for American consumers. The F.T.C., does have the power to break up large industry players but in reality is unlikely to affect gasoline prices materially any time soon. Read More Here.
The U.S. Department of Energy announced it will release 50 million barrels of oil from the Strategic Petroleum Reserve to lower oil prices. This release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the United Kingdom. This has been well telegraphed with oil down roughly 10% from recent highs. Read More Here.
Since the SPR moves oil had recovered somewhat, the Omicron wipeout could not have come at a better time and then in thin markets a break of technical support levels and with lower liquidity post the Thanksgiving holiday intensified the price drop. Benchmark oil has many facets, if one major leg breaks then others follow or try to rebalance with most senior traders off the desk the moves are magnified. Machines if turned on add further to the moves.
Many algorithms are math based and WTI futures broke their 100-day and 200-day moving averages triggering sells for algorithmic computer-driven trades when many participants were absent from the market. From here Banks often sell puts to producers who want to protect against a bear market. This feedback loop, known as negative gamma kicked in for option hedging and speculation which in turn fed on the futures prices and so on.
Bloomberg reported that the panic spread to every corner of the market from European diesel trades and time-spreads, the relative value of oil today to oil tomorrow, through to opaque options markets.
Equity Markets Sold Off Heightening Risk Off
Equity markets have sold off to daily lows on variant headlines. WHO is still meeting and set to give their verdict today. On the positive side South African scientist Sanne on vaccine efficacy on variant SA scientist says we have very indication that vaccines are still preventing severe COVID-19 deaths from variant . There will be more tests done by the middle of next week.
European markets closed down further from the rising COVID cases
- FTSE-3.7 %
- Euro Stoxx -3.7%
- Dax -4.2%
- CAC -4.9%
Earlier in the week The U.S. Department of Energy announced it will release 50 million barrels of oil from the Strategic Petroleum Reserve to lower oil prices. This release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the United Kingdom. This has been well telegraphed with oil down roughly 10% from recent highs which had recovered some before the virus news.
From The TradersCommunity US News Desk