Oil heads lower after seventh weekly gain on coronavirus mutation risk

Crude has rallied around 34% since the end of October on a series of vaccine breakthroughs that have created expectations for a recovery in energy dem
File image: Drop in prices of Oil (Representational photo) (REUTERS)
File image: Drop in prices of Oil (Representational photo)

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 nearly 3% after closing at the highest level 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 some European countries taking steps to limit travel with the UK.

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The new development comes as vaccines are being rolled out in several countries and as the US closes in on a stimulus plan. Congressional leaders reached a deal on a roughly $900 billion spending package to bolster the US economy, giving lawmakers a short timetable to review and pass what would be one of the biggest economic-rescue measures in the nation’s history.

Crude has rallied around 34% since the end of October on a series of vaccine breakthroughs that have created expectations for a recovery in energy demand next year. A weaker dollar has also boosted the appeal of commodities like oil that are priced in the currency. In the short term, however, prices are being buffeted by the fast-spreading virus leading to more stay-at-home orders.

Also Read : Covid sparks gas boom in India with oil refiners at full tilt

“We’re seeing oil erasing Friday’s gains, and it does suggest that rising infection rates and the institution of lockdown measures is starting to have an impact 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 that should be positive for oil demand.

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 Group Inc., said in a Bloomberg television interview on Friday. That’s when OPEC+ can return more supplies to the market, he said.

There are concerns, however, that rising prices may lure producers to tap capacity that’s been sidelined during the pandemic. Drilling rigs targeting crude oil in the US rose for a fourth straight week to the highest level since early May, according to data from Baker Hughes.

Also Read : Global oil demand is rebounding again after November trough

Oil’s futures curve is reflecting the conflicting long- and short-term signals. Brent’s prompt timespread is 4 cents a barrel in contango, a bearish signal where near-dated contracts are cheaper than later-dated ones. The spread was as much as 13 cents in backwardation earlier this month.

First Published Date: 21 Dec 2020, 15:21 PM IST

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