(Bloomberg) -- Oil plummeted as Europe’s worsening Covid-19 crisis renewed the prospect of lockdowns just as key consumers look to add emergency supply to the market.
Brent tumbled more than $3 on Friday, before later paring some losses, while the most traded WTI contract was near $76. The wave of infections in Europe is growing, once again raising the prospect of restrictions on mobility and a hit to oil demand. Austria imposed a lockdown and Germany said it couldn’t rule out similar measures.
The deepening concerns come as the oil market fixates on the prospect of a combined release from strategic crude reserves by the U.S. and China. The latter said Thursday it was working on one, while the U.S. has repeatedly said the option remains on the table.
After rising to the highest in seven years, oil has faltered over the past month even as the Organization of Petroleum Exporting Countries and its allies stuck with a cautious approach to restoring output. Alarmed by surging gasoline costs, U.S. President Joe Biden tried and failed to get the OPEC+ group to deliver more crude and then pivoted to a potential release from America’s Strategic Petroleum Reserve. A potential weakness in China’s economy has also contributed to the bearish factors.
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The grim Covid-19 news in Europe is “spoiling the party for oil bulls,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “Oil is likely to struggle for upside momentum in the short-term, given the focus on SPR, albeit almost priced in.”
While a lockdown in Austria is affecting a relatively tiny crude-demand pool, it’s the potential for contagion that has oil markets on edge. Germany’s top health official indicated that the country may have to clamp down harder. At the same time, the impact on currencies has pushed the dollar higher making commodities priced in the currency more expensive.
Some traders are also still placing bullish bets in the options markets, despite the recent selloff in prices. Contracts that would profit a buyer from a rally toward $200 traded on Thursday for the second consecutive week. While relatively cheap, such bets protect against a potential spike in prices.
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