Oil Rebounds After Rout as Traders Size Up Threat From Omicron

(Bloomberg) -- Oil rebounded from one of its biggest ever daily drops as traders assessed the risks to global demand from the Omicron variant of Covid-19 and the potential response by OPEC and its allies.

Brent rallied as much as 5.2%, climbing along with West Texas Intermediate. The World Health Organization warned the new strain could have severe consequences, while South Africa has said it appears to be more infectious, but with mild symptoms. 

OPEC and its allies have already moved technical meetings in order to give themselves time to review the rout on Friday. The group is scheduled to gather later this week and decide on its output plan for January, with a pause in supply hikes on the cards, according to Morgan Stanley.

While the fundamental driver of oil’s eye-watering selloff on Friday was the emergence of Omicron, by the end of the day everything from technical selling to options markets was contriving to push the market lower. Still, analysts from Goldman Sachs to Energy Aspects said that the move was overdone and traders are now waiting to see how severe the variant’s impact will be.

“Clearly there are fears that this could have a considerable impact on demand,” said Carsten Fritsch an analyst at Commerzbank AG. “That said, Friday’s price slide was excessive.”

The Organization of Petroleum Exporting Countries and its allies will discuss the market situation and any relevant necessary steps, Russia’s Deputy Prime Minister Alexander Novak said Monday. The group postponed a ministerial meeting to get more information about current events, including the new Covid strain, he said. 

OPEC will likely take a cautious stance when it gathers this week, according to Vitol Group, the world’s biggest independent oil trader. There’s also set to be more flight cancellations this week as a result of the variant, Mike Muller, the company’s head of Asia said.

As a result of Friday’s slump, oil market volatility has blown out. One gauge of price fluctuations climbed to its highest level since May 2020. That also accompanied a surge in trading volumes as prices retreated on Friday. 

The selloff wasn’t just concentrated on the front end of the oil curve either. Brent for December 2022 shed almost $8 on Friday, and had clawed back about $2.70 of that loss on Monday. The level of backwardation -- a bullish structure indicating tight supply -- in the futures curve also fell sharply.

“The price move was dramatic throughout the whole curve,” said Keshav Lohiya, founder of Oilytics. “Scale buying deferred Bent structure is a good risk-reward trade here as we believe backwardation is here to stay.”

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