Oil Futures Plummet as Europe Returns to COVID Lockdowns

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange fell more than 1.5% in early trade Monday, sending the international crude benchmark below $81 per barrel (bbl), as investors monitor an uptrend in COVID-19 infections across European Union and Russia, that have prompted several governments in the region to bring back quarantine restrictions in their effort to slow the viral spread ahead of the winter months.

Europe once again became the epicenter of a COVID-19 outbreak, with new cases in Germany, Netherlands and Russia climbing to their highest levels since the early days of the pandemic. The World Health Organization estimates coronavirus deaths rose by 10% in Europe in the past week, with low vaccination rates in central and eastern European countries seen as a main driver behind the surge. Russia -- with barely a third of the population vaccinated -- has seen a steady two-month uptrend in new COVID-19 infections and now leads the world in total coronavirus deaths for the first time since the start of the pandemic.

Faced with dire heath crisis, many governments in the region have once again resorted to unpopular quarantine measures but this time only for those who rejected the vaccine.

Austrian Chancellor Alexander Schellenberg announced a targeted lockdown starting Monday for all those who are 12 and older who have not been inoculated -- meaning around 30% of the country's population must stay at home except for a few limited reasons. The new rules will be reinforced by police officers carrying out spot checks on those who are out.

The Netherlands' government announced similar measures on Friday, while also limiting hours of operation for restaurants and bars. In Germany, where cases on Sunday surged to a new record of more than 50,000, the country's health minister, Jens Spahn, said the public health officials must do "everything necessary" to break the latest wave of the disease, Deutsche Welle reported. "The situation is serious, and I recommend that everyone takes it as such," he added.

The latest COVID-19 wave will likely bolster the view that the lingering impact of the pandemic will curb oil demand. Organization of the Petroleum Exporting Countries last week said it expects global oil demand to average 99.49 million barrels per day (bpd) in the fourth quarter, down 330,000 bpd from their forecast in October.

Domestically, consumer sentiment unexpectedly collapsed in early November as Americans grew increasingly worried about rising inflation along with the COVID-19 pandemic. Consumers see price increases accelerating to 4.9% over the next year, the highest since 2008. That waning confidence has some economists saying the spike in prices could dent supercharged consumer spending that's fueled this year's economic recovery.

Despite higher wages, surging costs for goods are eroding consumers' purchasing power. Consumer price index -- a measure of inflation, spiked to 6.2% in the 12 months ending in October, delivering a gut-punch to an already slowing economic recovery. Federal Reserve's long-held inflation target has been around 2%. President Joe Biden vowed last week to address rising gasoline and food prices, but no specific policy has yet been presented.

"Everything from a gallon of gas to a loaf of bread cost more," conceded Biden. "It's worse even though wages are going up. We still face challenges."

Analysts suggest that Federal Reserve will likely consider ending its bond-buying program earlier than expected to position the markets for the first interest rate hike since March 2020. The CME Group's FedWatch tool is now pricing in a 68.8% chance of a rate hike by June of next year, notably earlier than prior forecasts, while the benchmark two-year Treasury notes are trading at 0.536%, more than double the Fed's target range of between 0% and 0.25%.

Near 7:30 a.m. ET, NYMEX West Texas Intermediate futures for December delivery fell more than $1 to below $80 bbl, and the Brent contract for January declined to $80.95 bbl, down $1.22 on the session. NYMEX RBOB December futures fell 3.48 cents to $2.2763 gallon and front-month NYMEX ULSD futures declined 4.39 cents to $2.3595 gallon, with the ULSD contract falling to a fresh five-week low on the spot continuation chart at $2.3510 overnight.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges