Oil falls on new Covid-19 strain setback

"The travel restrictions that the new strain of Covid-19 has triggered are indeed affecting some oil demand but the news of a final US stimulus agreement are also too significant to brush off.

Thus, the market may be overly cautious to the Covid-19 setback as it is doubtful that it changes much the global picture of the pandemic.

The price reaction may be triggered by the new Covid-19 strain but the full effect of the decline may be more a result of the market’s realisation that despite the vaccine breakthrough, there is still some uncertainty out there, a thought largely ignored in this month’s price rally.

Nevertheless, the risk of more lockdowns and reduced global travel continues to gain traction, and some bearish news keep rolling in ahead of the Christmas holiday.

The emergence of the first Covid-19 case in Taiwan after being virus-free for almost 250 days and the order for a holiday lockdown in Ontario, which makes up about 40% of Canada’s population, were not only reactions to a new strain of the coronavirus thousands of miles away from the UK, but mandates dealing with local outbreaks.

New restrictions worldwide will have an immediate impact on jet and road fuels demand, and oil prices are sliding down in accordance, with WTI extending more serious losses down to US$47 per barrel, while Brent has managed to tread above US$50 per barrel for the time being.

News of Russia wanting to push for a 500 000 bpd supply hike for February 2021 to match the January 2021 increase was also met with skepticism from the oil market, which before it can take on new supply must address how acute the current demand risks are.

The oil world will need to quickly sober up after the New Year’s festivities and watch the coming OPEC+ meeting closely to understand how the new verdict will affect global balances going forward.

Any decision to increase output will of course bring some downside risk for prices, so if Russia gets its way, Brent’s 50+ dollar level is threatened.

What makes the price reaction today surprising – and maybe reversible – is that amid the market panic, a US$2.3 trillion lifeline was cast.

The fresh US$2.3 trillion stimulus into the US economy (US$1.4 trillion in government spending and US$900 billion in Covid-19 relief) could translate into at least 500 000 bpd of increased oil demand in 2021.

In any normal day this news would be celebrated in the market and would add some fat to oil prices. Yet the stimulus deal has been discussed since some time and as we approached the final stage of the negotiation, the expectation for a deal was already mostly priced in last week.

The next few months will be anything but easy, but there is seemingly a corner just ahead – a world with vaccines and travel - and more oil demand."

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