There has been no lack of surprises for the oil market in 2020 and just before the year concludes, when traders were finally thinking that certain stability has prevailed, prices plunged on news of a new Covid-19 strain in the UK.
The market has been hiking oil prices over the last few weeks, thinking that the pandemic is getting under control due to the vaccine breakthrough. However, prices were far too high in relation to the uncertainty, which explains the steep drop when the first setback sank in today.
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. Perhaps the drop would have been even more dramatic had it not coincided with a $900 billion stimulus package from the US.
While all the leading vaccines on the market should work against this new strain, governments around the world will have to act decisively to stop the spread of this new mutation – as already evidenced by intra-Europe travel bans.
The new Covid-19 strain will have an immediate impact on jet fuel demand. In a normal year, daily jet fuel demand in Europe is around 1.4 million bpd, and it is currently hovering around 600,000 bpd, to which we see downside risk with the new travel hysteria.
In the short-term, we expect mobility restrictions in the US and Europe introduced in 4Q20 to mostly spill over into 1Q21, for which we expect oil demand to average 93.6 million bpd.
In the next few days, prices moves will likely largely depend on news about this new Covid-19 strain and how it complicates the fight against the pandemic.
Today’s price move is a good lesson for the market that even when traders see stability, there is always something unexpected that can happen and then inflated prices reveal their glass legs, breaking when the first major tremble hits.
