By Barani Krishnan
Investing.com - There were always fears that they could return and they have, to flip the long-running oil rally.
Covid lockdowns not reported for months are back in the news amid Europe’s rush to contain rampaging cases of the virus, hammering the oil market harder this week than anytime over the past three months, with crude prices down as much as 11% from the year’s highs.
Few could have anticipated this, when just weeks ago OPEC+ smugly turned down pleas from the United States and other consuming countries to put out more barrels to cool prices that had soared to seven-year highs from a continued production squeeze by the alliance despite demand for energy soaring from the worst of the pandemic.
To be sure, OPEC+ — comprising the Saudi-led 13-member OPEC bloc and 10 other oil producing countries steered by Russia — could double down on cuts after this to prevent the market from collapsing further.
Yet, there’s nothing like the combination of soaring demand and tight production to send oil prices higher. And that demand looks questionable in the near term if more countries go into lockdown, as such a situation could slow a return to work and recovery in aviation, which determine the consumption of gasoline, diesel and jet fuel.
Covid aside, there’s also another damper for oil bulls — the threat by the United States, China and a number of consuming countries to coordinate the release of their crude reserves to strike back against OPEC+ production cuts that have created runaway oil inflation in their economies.
Again, what the consumers can do to fight the alliance is minimal. But it is just one more worry that oil traders don’t need, evidenced by the 4% price plunge in the first three days of this week, even before Friday’s slump triggered by news of Austria going into lockdown and Germany considering the same.
“It looks like the music has stopped for now for oil bulls,” John Kilduff, founding partner at hedge fund Again Capital, said, referring to the 12% selloff over the past four weeks in crude that came after a rally of few stops between March and October that put the market up more than 30%.
“Unless the cold weather comes a little quicker to facilitate heating needs from energy products, expect crude to trade between $70 to $75, with the possibility of the lowers $60s too if Covid cases worsen.”
The front-month January contract in West Texas Intermediate, the U.S. crude benchmark, settled down $2.91, or 3.2%, at 75.94 per barrel. For the week, it fell 5.8%, bringing its combined losses over the past four weeks to 9.3%, after an 18% rally over nine straight weeks. Just in mid-October, WTI traded at a seven-year high of $85.41. Despite the slump of the past week, the U.S. crude benchmark remains up 57% on the year.
The January contract for London-traded Brent, the global benchmark for oil, settled down $2.35, or 2.9%, at $78.89 per barrel. For the week, Brent fell 4%, bringing its combined losses over the past four weeks to 8%, after an 18% rally over seven weeks in a row. Just in mid-October, Brent traded at a seven-year high of $86.70. Despite the slump of the past week, the global crude benchmark remains up 52% for the year.