Oil slumps on Omicron fears; posts biggest monthly fall in 20 months

Crude futures ended November with their biggest monthly declines since the outset of the pandemic. PHOTO: REUTERS

NEW YORK] (REUTERS) - Oil prices tumbled on Tuesday (Nov 30) after Moderna's chief cast doubt on the efficacy of Covid-19 vaccines against the Omicron coronavirus variant, spooking financial markets and heightening worries about oil demand.

Crude futures ended last month with their biggest monthly declines since the outset of the pandemic, as the new variant, along with expectations that coming emergency reserve releases will juice growing supply, has cut the legs out of the market's year-long rally.

Mr Stephane Bancel told the Financial Times that Covid-19 vaccines are unlikely to be as effective against the Omicron variant as they have been against the Delta variant.

Brent crude futures fell US$2.87, or 3.9 per cent, to settle at US$70.57 a barrel, after hitting an intraday low of US$70.22, the lowest since August.

United States West Texas Intermediate (WTI) crude futures ended US$3.77, or 5.4 per cent, lower at US$66.18 a barrel. The benchmark dropped to a session low of US$64.43, also its lowest since August.

WTI edged up in post-settlement trade to US$66.74, after industry data showed a smaller US crude stock draw-down than the 1.2 million barrels forecast in a Reuters poll. Stocks fell 747,000 barrels last week, according to market sources citing American Petroleum Institute figures. Government data will be released on Wednesday.

For last month, Brent fell by 16.4 per cent, while WTI fell 20.8 per cent, the biggest monthly fall since March last year.

"The threat to oil demand is genuine," said Rystad Energy senior oil markets analyst Louise Dickson. "Another wave of lockdowns could result in up to three million bpd (barrels per day) of oil demand lost in the first quarter of 2022."

Also pressuring prices, Federal Reserve chair Jerome Powell said the US central bank likely will discuss speeding its reduction of large-scale bond purchases at its next policy meeting, amid a strong economy and expectations that a surge in inflation will persist into the middle of next year.

Activity in later-dated futures contracts shows that the market is becoming less worried about demand outstripping supply in the short term, and of oversupply in the first half of next year.

The premium on Brent and US crude contracts expiring in one month versus those expiring in six months has narrowed to its lowest levels since March. This metric is closely watched by traders as an indicator for future supply; the higher the cost of the near-dated contract, the more worries there are about a coming supply deficit.

Brent's six-month backwardation narrowed to around US$1.50 per barrel, the lowest since March. WTI's six-month backwardation fell to about US$1.90 per barrel, its lowest since September. That reduced premium indicates less worry about future supply and current levels of demand.

It is unclear if the Organisation of the Petroleum Exporting countries and their allies, together called Opec+, will put on hold plans to add 400,000 bpd to supply in January.

The group was already weighing the effects of last week's announcement by the US and other countries to release emergency crude reserves to temper energy prices.

"Following the global strategic reserve releases and the announcement of dozens of countries restricting travel... Opec and its allies can easily justify an output halt or even a slight cut," Oanda analyst Edward Moya said in a note.

The increase in Opec's oil output last month has again undershot the rise planned under a deal with allies, a Reuters survey found on Tuesday.

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