Oil pared gains in volatile trading after rebounding from one of its biggest daily drops as traders weighed the risks to demand from the omicron variant of Covid-19 and the potential response by Opec and its allies.
Futures in New York were up about 3.5% on Monday after earlier rallying as much as 7%. The World Health Organisation warned the new strain could have severe consequences, while scientists in South Africa said it appears to be more infectious, but with mild symptoms.
The Organisation of Petroleum Exporting Countries (Opec) and its allies have moved technical meetings in order to give themselves time to review oil’s rout late last week.
Opec+ is scheduled to gather later this week and decide on its output plan for January, with a pause in supply hikes possible, according to Morgan Stanley.
While the fundamental driver of oil’s sell-off on November 26 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 Group Inc to Energy Aspects Ltd said the move was overdone and traders are now waiting to see how severe the variant’s impact will be.
Opec will likely take a cautious stance when it gathers this week, according to Vitol Group, the world’s biggest independent oil trader. More flight cancellations are also likely this week as a result of the variant, Mike Muller, the company’s head of Asia said.
As a result of the 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.
The sell-off wasn’t just concentrated on front end of the oil curve. Brent for December 2022 shed almost $8 and had clawed back about $3 of that loss on Monday. The level of backwardation in the futures curve also falls sharply.
Oil has backtracked since hitting a multi-year peak in late October as leading consumers including US announced releases of crude from strategic stockpiles to combat rising prices.