Oil prices suffered one of the largest-ever one-day plunges, crashing more than 11 percent on Black Friday as a new SARS-CoV-2 strain sparked fears that renewed lockdowns will hurt global demand.
The crash, the seventh-largest ever for Brent crude, the global oil benchmark, might prompt the OPEC+ cartel to reconsider its policy when it meets next week, with the group increasingly leaning toward pausing its output hikes.
Benchmark US crude oil for January delivery on Friday fell US$10.24 to US$68.15 a barrel, down 10.4 percent weekly.
Brent crude for January delivery fell US$9.50 to US$72.72 per barrel, down 7.8 percent for the week.
The sell-off was amplified by low liquidity on a festive day in the US, the breach of several technical supports and Wall Street banks rushing to dump oil futures to protect themselves against positions in the options market.
The development apparently wrong-footed many in the oil market who had been comforted by low inventory levels and demand that had rebounded to 2019 levels, said Rebecca Babin, senior energy trader at CIBC Private Wealth Management.
“It was a lack of downside that had us continuing to think nothing bad could happen,” she said. “No one was thinking we could get a variant that we’re not familiar with and it could have meaningful impact.”
The price drop capped a dramatic week for the oil market, which started when US President Joe Biden challenged OPEC+ by tapping the country’s strategic petroleum reserve in an effort to bring gasoline prices down. China, India, Japan and South Korea all joined the US effort.
Oil traders and analysts were divided about whether the flash crash was an excessive reaction to the COVID-19 news.
Damien Courvalin, oil analyst at Goldman Sachs in New York, called the drop an “excessive repricing” and said OPEC+ would respond by pausing its production increases by three months.
High gasoline retail prices prompted Biden to seek ways to ease the pressure on consumers, leading to Tuesday’s announcement that the US would release 50 million barrels of crude from the US Strategic Petroleum Reserve, with China, Japan, India, South Korea and the UK also set to tap inventories. Still, oil rose on the day that the move was confirmed, suggesting traders had already priced in the new supply, or that they were underwhelmed by the supply response.
OPEC+ had warned previously it would reconsider a potential output increase if other nations went ahead with a reserve release.
UBS Group AG said on Friday that OPEC+ could pause its current planned output hike of 400,000 barrels a day, or even cut production.
Friday’s oil sell-off was likely exacerbated by a lack of trading activity during the US holiday period, coming a day after Thanksgiving, and as the New York market closed early.
“It’s a sign the market got carried away from itself and that we still remain very vulnerable to COVID-19,” Again Capital LLC founding partner John Kilduff said.
Aside from the headline prices, crude traders also watched several other notable shifts in the market.
West Texas Intermediate crude futures closed below its 200-day and 100-day moving averages, signs of technical weakness. The extreme pressure on the US benchmark meant its discount to Brent expanded, reaching the widest since May last year.
The picture was not much brighter in oil-product markets, the part of the oil complex most directly affected by end-user demand. Diesel plunged, particularly in Asia, as the market began to price in a potential renewed hit to economic growth.
“This is a huge overreaction in terms of the market,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd said in a Bloomberg Television interview. “This is the market pricing in the worst possible scenarios.”
Additional reporting by AP
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