Oil slumps on Omicron fears; posts biggest monthly fall in 20 months

© Reuters. FILE PHOTO: Pipelines run to Enbridge Inc.'s crude oil storage tanks at their tank farm in Cushing, Oklahoma, March 24, 2016. REUTERS/Nick Oxford

By Stephanie Kelly

NEW YORK (Reuters) - Oil prices tumbled on Tuesday after Moderna (NASDAQ:MRNA)'s chief cast doubt on the efficacy of COVID-19 vaccines against the Omicron coronavirus variant, spooking financial markets and heightening worries about oil demand.

Crude futures ended November with their biggest monthly declines since the outset of the pandemic, as the new variant, along with expectations that coming emergency reserve releases will juice growing supply, has cut the legs out of the market's year-long rally.

The head of drugmaker Moderna Inc told the Financial Times that COVID-19 vaccines are unlikely to be as effective against the Omicron variant of the coronavirus as they have been against the Delta variant.

Brent crude futures fell $2.87, or 3.9%, to settle at $70.57 a barrel, after hitting an intraday low of $70.22, lowest since August.

U.S. West Texas Intermediate (WTI) crude futures ended $3.77, or 5.4%, lower at $66.18 a barrel. The benchmark dropped to a session low of $64.43, also its lowest since August.

WTI edged up in post-settlement trade to $66.74, after industry data showed a smaller U.S. crude stock drawdown than the 1.2 million barrels forecast in a Reuters poll. Stocks fell 747,000 barrels last week, according to market sources citing American Petroleum Institute figures. Government data will be released on Wednesday.

For November, Brent fell by 16.4%, while WTI fell 20.8%, the biggest monthly fall since March 2020.

"The threat to oil demand is genuine," said Louise Dickson, senior oil markets analyst at Rystad Energy. "Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022."

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding its reduction of large-scale bond purchases at its next policy meeting, amid a strong economy and expectations that a surge in inflation will persist into the middle of next year.

Activity in later-dated futures contracts shows that the market is becoming less worried about demand outstripping supply in the short term, and of oversupply in the first half of next year.

The premium on Brent and U.S. crude contracts expiring in one month versus those expiring in six months has narrowed to its lowest levels since March. This metric is closely watched by traders as an indicator for future supply; the higher the cost of the near-dated contract, the more worries there are about a coming supply deficit.

Brent's six-month backwardation narrowed to around $1.50 per barrel, the lowest since March. WTI's six-month backwardation fell to about $1.90 per barrel, its lowest since September.

That reduced premium indicates less worry about future supply and current levels of demand.

It is unclear if the Organization of the Petroleum Exporting countries and their allies, together called OPEC+, will put on hold plans to add 400,000 barrels per day (bpd) to supply in January. The group was already weighing the effects of last week's announcement by the United States and other countries to release emergency crude reserves to temper energy prices.

"Following the global strategic reserve releases and the announcement of dozens of countries restricting travel... OPEC and its allies can easily justify an output halt or even a slight cut," OANDA analyst Edward Moya said in a note.

The increase in OPEC's oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found on Tuesday.