Variant B.1.1.529 Spooks Equities and Oil Markets

It was  a day of market panic as the Dow cracked 1,000 points and most of the European markets fell 2-3%. But the biggest casualty was crude oil as it fell 10-12% in response to the B.1.1.529 variant of the COVID virus. Oil is most vulnerable to demand shocks and thus oil was just representative of the panic.
 

What exactly is this B.1.1.529 variant?

As of now, now much is known except for the fact that it is a mutating strain of the COVID virus. What this means is that your immune system cannot respond and build defences against this variant, fast enough. As a result, even vaccinations may not be effective as some recent cases have shown.

It is the panic reaction that hit hard. For example, UK, Singapore and Israel have imposed severe movement and travel restrictions, especially from Africa.

Rest of Europe is following suit and that is not great news for oil demand. By mid-day trades on 26-Nov, the price of Brent was down -10.4% and the US based WTI crude was down 11.7%.

Variant B.1.1.529 threatens to change oil economics

Oil prices are largely determined by forces of demand and supply. Currently, the average daily oil demand is around 98.40 million barrels while the supply is around 96.38 million barrels. This supply shortfall of 2 million barrels a day has kept oil prices buoyant. Now, markets are apprehensive this equation could change. Here is why.

A) Europe is a major importer and consumer of oil and it is largely used for travel and transport. if travel and movement restrictions could come in soon, then it is likely to impact the demand for oil from Europe. Demand could contract rapidly.

B) Any sudden disruption in movement would mean that industries across the board would look to restrict output and supply chain constraints will make it worse. That is why oil has slipped to $73 for Brent and to below $70 for WTI crude.
 

Check - Crude Oil at $75/bbl – Here comes inflation
 

Now the release from SPR could magnify the oil price fall

A quick background first. A couple of days back, the US had announced it would release 50 million barrels of oil from its strategic petroleum reserves (SPR). India, Japan and Korea are joining in and the alliance and the total release could be close to 80 million barrels.

Now the story of why oil prices fell appears to be making sense. A reserve discharge of 80 million barrels is large enough to just wipe 40 days of oil surplus. That had already put pressure on the oil prices.

In addition, if demand contracts due to the B.1.1.529 variant, the current supply deficit could morph into a supply surplus in no time. It is this concern that is putting pressure on prices. If there is one commodity in the world most vulnerable to insufficiency of demand, it is crude oil.

Also Read: Sectors dependent on crude Oil