New Covid Strain Rekindles Demand Fears, Cause Near-3% Drop In Oil Prices

But Monday also saw developments that may resuscitate the bull crude market: File Image/Pixabay

Fear over a new strain of Covid in Britain, Australia, the Netherlands, and Italy thought to be significantly more transmittable than the original rekindled worries about a slower recovery in fuel demand and caused oil to drop nearly 3 percent on Monday.

After it was announced that Britain's parliament was imposing tighter restrictions and other countries were prohibiting travel to the U.K.,  Brent settled down $1.35, or 2.6 percent, at $50.91 per barrel, while West Texas Intermediate for delivery in January ended the session $1.36, or 2.8 percent, lower at $47.74; a stronger U.S. dollar also weighed on prices.

Giovanni Staunovo, oil analyst at UBS, predicted that European oil demand will suffer due to the new mobility restrictions: "Investors need to be mindful that the road to higher oil demand and prices will remain bumpy."

Rystad Energy analyst Louise Dickson added, "The new strain of the coronavirus in the UK has shown us that the vaccine optimism holding Brent above $50 per barrel could be deflated in a fleeting moment."

Still, many developments on Monday boded well for a resumption of a bullish crude market, including the rollout of a new vaccine in the U.S., approval in Washington for a $900 billion coronavirus aid package, and European regulatory approval for the use of the Covid vaccine jointly developed by Pfizer and BioNTech, with inoculations expected to start within a week.

Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, said he expected the vaccines would limit broad market downside: "A correction is justified but a very strong sell-off would surprise us... because of the vaccine, by next March-April, we should be able to think about normalization again."

Meanwhile, Alexander Novak, deputy prime minister for Russia, said on Monday that oil production should be restored in line with rising demand and the output rise should not result in oversupply; he added that recovery of global oil markets was slower than expected and could take two to three years to fully recover.

Novak also warned U.S. president elect Joe Biden not to derail the Organization of the Petroleum Exporting Countries (OPEC) and allies' attempt to reduce output and bolster the global oil market.