Oil Futures Dragged Lower by Vaccine, Omicron Fears

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled the last trading day of November with sharp losses, propelled by concerns over emerging new risks to global aviation and fuel demand growth tied to a highly mutated omicron variant of coronavirus and potential for further supply chain disruptions should governments resort to lockdowns and other quarantine measures to arrest a winter surge in infections.

Fresh concerns about efficacy of existing vaccines against a highly mutated omicron variant sent markets into a tailspin on Tuesday. The Dow Jones Industrial slid more than 600 points, the U.S. Dollar Index weakened sharply against other currencies and the U.S. oil benchmark dropped below $65 barrel (bbl) before paring some of those losses at settlement. The selling was in part triggered by comments from Moderna CEO Stephane Bancel who suggested that COVID-19 vaccines would be less affective against a new strain of COVID-19 due to a high number of mutations. Scientists said mutations may lead to a milder illness but higher transmittance which would allow omicron to replace delta as a dominant strain. In an interview with London-based Financial Times, Bancel said, "I think it's going to be a material drop. We just don't know how much yet. Every scientist I spoke to told me it's not going to be good." He also added it might take months to develop a new vaccine, scale up production and redistribute it.

There is still a lot unknown about the virus and how it affects those who already got the vaccine or vulnerable populations. But consensus so far is that the global aviation sector will feel an immediate hit from renewed quarantine requirements followed by domestic air travel as consumers begin to pullback on flying. The U.S., UK and other nations re-imposed travel bans on South Africa and neighboring countries associated with the latest COVID variant, dealing a further blow to air travel at a time of already increasing fears of winter resurgence in the Northern Hemisphere. Japan on Monday (11/29) followed Israel in shutting its borders completely to foreigners for at least a month, just weeks after it eased entry rules to the country. S&P Platts estimates that for every reduction of 10,000 flights flown, global jet fuel demand would be reduced by 600,000 to 700,000 barrels per day (bpd). Global oil demand will likely contract by a sharp 1.6 million bpd from the fourth quarter of 2021 to the first quarter of 2022, due to seasonal factors, the impact of higher prices and outbreaks of COVID-19 infections in some countries, according to Platts.

Against this backdrop, OPEC+ ministers postponed their monthly meeting until Thursday (12/2) to assess the impact of tougher travel restrictions on global demand growth. Renewed COVID controls could alter demand growth calculation by the producers' group, which was on track to again raise supplies by 400,000 bpd next month following their record 9.7 million bpd cuts introduced at the beginning of the pandemic. OPEC+ still has about 3.8 million bpd of these cuts in place and some analysts suggest that should the coalition choose to support prices against the threat of emerging variant, it might forgo planned increases until February, buying more time for the market to recover. Ahead of the ministerial meeting, Russia and Iraq came out in favor of sticking with the group's monthly production increases, however the stance of more hawkish members such as Saudi Arabia remains unclear. Russia's Deputy Prime Minister Alexander Novak on Nov. 29 said "hasty decisions" are not necessary, adding that market reaction to the omicron variant were "extremely emotional" and short-lived, as there is no scientific data to back up rising fears. Analysts at Morgan Stanley said in a note this week, "With uncertainty over omicron, we expect that OPEC will shelve its target to increase output in January and keep its quota flat."

Separately, U.S. crude-oil inventories expected to decrease by 800,000 bbl for the week ended Nov. 26, with gasoline stockpiles seen falling by 500,000 bbl from the previous week. Stocks of distillates are expected to be unchanged from the previous week.

Refinery utilization likely rose by 0.6 points from the previous week to 89.2% of capacity.

The American Petroleum Institute is scheduled to release its weekly inventory report at 4:30 p.m. EST, followed by official data from U.S. Energy Information Administration Wednesday morning.

On the session, West Texas Intermediate January futures plummeted $3.77 bbl to $66.18 bbl and International benchmark ICE January Brent expired at $70.57 bbl, down $2.87 bbl. Next-month delivery February Brent declined a steeper $3.99 for $69.23 bbl settlement. NYMEX RBOB December futures expired 9.70 cents lower at $1.9801 gallon, and January contact narrowed its discount to 4.0 cents. Front-month NYMEX ULSD expired 8.83 cents lower at $2.0638 gallon and next-month delivery January futures settled at $2.0603 gallon, down 8.79 cents.

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

Liubov Georges