Brent crude tumbles more than 3% as bearish headwinds mount

Oil extended declines — falling more than 3% — as the rapid spread of the omicron virus variant raised concern over the demand outlook.

Futures in London tumbled near $71 a barrel after dropping 2.2% last week. Infections are rising from the US to Europe as authorities struggle to tame the spread of omicron. That’s led to restrictions on air travel and stricter curbs on movement, creating fears that will flow through to weaker energy demand.

Oil’s market structure is also showing signs of weakness. The prompt timespread for Brent once again flipped briefly into a bearish contango pattern on Monday, indicating the market is becoming over-supplied.

Bearish headwinds are mounting moving into the holiday period, when thinner trading volumes can exacerbate prices swings. Demand in Asia is softening, central banks are pivoting toward tighter monetary policy to try and rein in accelerating inflation, and President Joe Biden’s economic agenda saw a setback after Senator Joe Manchin rejected a spending package.

“We can look forward to a week of a lot of volatility,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte. “But it’s dangerous to assume that oil will plunge further from here because OPEC+ is sitting there watching, and they have left themselves the room to react very quickly if they need to.”

Prices

Brent for February settlement lost 3.3% to $71.07 a barrel on the ICE Futures Europe exchange as of 7:35 a.m. London time after declining 2% on Friday. The prompt timespread was 1 cent in backwardation, compared with 30 cents at the start of the month. West Texas Intermediate for January delivery, which expires Monday, slid 3.7% to $68.25 on the New York Mercantile Exchange. The more active February contract dropped 3.7% to $68.09.

New York state broke a record for new infections and New York City Mayor Bill de Blasio called on the federal government to step up supplies of tests and treatments to the city amid a spike in infections caused by omicron. The Dutch government announced plans to enforce a stricter lockdown, while Germany’s health minister warned of another virus wave caused by omicron.

Other oil-market news:

The Biden administration’s release of crude from US emergency reserves to cool oil’s rally is going into a second round, with bids due by the first working day of the year. Equinor ASA will drill about 25 exploration wells off Norway’s coast next year in a bet that it will be among the last companies still producing oil and gas when the world has achieved net-zero emissions. Libya may introduce contracts with private oil companies that would give bonuses to those that meet targets and penalise those that don’t.