Omicron variant concerns rattle oil prices and global markets

US crude prices fell as much as 13 per cent per barrel, the largest daily drop since April 2020

Passengers queue to check-in for a flight on Singapore Airlines at OR Tambo International Airport in Johannesburg, South Africa. Oil prices and global stock markets fell on Friday amid concern a new vShow more

Oil prices and global stock markets fell on Friday amid concerns the new Omicron Covid-19 variant discovered in South Africa could dampen economic growth and hit fuel demand.

Brent, the global benchmark for two-thirds of the world's oil, slid 11.55 per cent to $72.72 per barrel when markets closed on Friday, while the US crude gauge West Texas Intermediate dropped 13.06 per cent to $68.15 per barrel, the largest one-day decline since April 2020.

“A new Covid-19 variant has put crude oil prices under heavy selling pressure on Friday, with prices falling to a 3-month low,” Giovanni Staunovo, strategist at UBS, said in a note. “Lower market liquidity post the Thanksgiving holiday in the US has also likely exaggerated the move.”

The World Health Organisation designated the new B.11.529 Covid-19 mutation as a “variant of concern” following an emergency meeting on Friday. The agency named the new variant Omicron.

“This variant has a large number of mutations, some of which are concerning. Preliminary evidence suggests an increased risk of reinfection with this variant, as compared to other [variants of concern]," the WHO said.

The variant has led to flight bans and a scramble to determine vaccine efficacy. The EU, the US, Canada and the UK all imposed travel restrictions on visitors from countries in southern Africa.

The UAE also suspended the entry of travellers from seven southern African countries due to concerns over the new Covid-19 variant.

The decision, which comes into effect on November 29, will affect passengers who have travelled through South Africa, Namibia, Lesotho, Eswatini, Zimbabwe, Botswana or Mozambique over the past 14 days, according to an announcement by the General Civil Aviation Authority and the National Emergency Crisis and Disasters Emergency Management Authority on Friday.

Global stock markets fell on fears that the new Covid-19 variant could impede the global economic recovery. The Dow Jones Industrial Average closed down 2.53 per cent to 34,899, its worst day since late October 2020, while S&P 500 fell 2.27 per cent to 4,594, its worst one-day drop since February 25 and the Nasdaq Composite dropped 2.23 per cent to 15,491.

The UK's FTSE 100 Index slid 3.64 per cent to 7,044.03, while Japan's Nikkei 225 index dropped 2.53 per cent to 28,751.

Shares in United Airlines, Delta Air Lines and American Airlines slumped on concerns that a new variant of coronavirus could hit travel demand.

"The market mood is souring, as investors don’t know whether the equities could survive another economic hit with less support from the central banks, as central banks would have to deal with a dual fight that’s intensifying on both fronts: inflation is rising, and Covid news are getting worrisome," said Ipek Ozkardeskaya, a senior analyst at Swissquote.

"The problem is that they can’t use the same tools to fight back inflation and the economic slowdown. And the choice will be difficult ... the only encouraging news is the easing oil prices, which could tame the inflationary pressures and give more time to the central banks before pulling back support."

Investors will be closely watching the Opec+ meeting, scheduled to take place on December 2, where member countries of the group will review future production levels.

"Depending on how this virus-led sell-off evolves, and how concerned the WHO is of it, the calculations surrounding the Opec+ meeting next week could change. Opec+ has stated repeatedly that one area of caution was the resurgence of Covid-19 eroding oil demand as the grouping raises production," said Jeffrey Halley, senior market analyst, Asia Pacific at OANDA.

"One takeout for sure is that Opec+ will not increase production above its previously agreed 400,000 bpd target next week, despite the noise from its major customers. At this stage, I do not believe they will look to reign in production, unless the market situation really deteriorates next week, and oil prices experience a much deeper slump."

Opec+ agreed to increase output by 400,000 bpd in December, despite the pressure from the US to bring on additional supply. It adhered to its earlier agreement to bring a total supply of 2 million bpd back to markets by the end of the year.

The 23-member Opec+ group, which is led by Saudi Arabia and Russia, has played a key role in bringing stability to oil markets, according to Saudi Arabia’s energy minister.

The group “delivered more sustainability, more stability, more predictability and more transparency to oil markets”, Prince Abdulaziz bin Salman told the Abu Dhabi International Petroleum Exhibition and Conference earlier this month.