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.”