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The day after Thanksgiving has been choppy before - fewer traders can mean more volatility - but nothing like this year. The early morning sell-off saw a full-blown crash, as the newly named Omicron variant of Covid derailing the world's fight against the pandemic.
At the end of the day investors were rushing to cover short positions, analysts were ripping up forecasts and next week s OPEC meeting was up in the air. West Texas Intermediate oil, the U.S. benchmark, was 13% lower, the biggest decline since April 2020. Brent crude fell by 12%.
Oil had risen steadily through the year, staging a comeback as economic life gradually recovered from the pandemic, putting drivers back in cars and passengers into planes. Global demand is close to the pre-pandemic levels of 100 million barrels a day, according to analysts. With OPEC keeping a tight grip on supply, several senior traders said $100 oil could be close.
The news of a new variant of Covid 19 sent familiar shivers through the market, as scientists fear it could be more transmissible and less susceptible to vaccines than existing strains. The biggest single day plunge since the early days of the Pandemic shows how fragile this recovery is.
Craig Erlam, senior market analyst at Oanda Europe said it was a crazy day in the markets that is very reminiscent of last March.
The initial plunge was driven by renewed fears of widespread travel bans and travel bans, but a host of technical factors, including anaemic post-holiday volumes, exacerbated the sell-off. The panic spread to every corner of the market from European diesel trades and time-spreads to the relative value of oil today to oil tomorrow, to opaque options markets.
The price drop has been increased due to factors such as the breakup of technical support levels and an environment with less liquidity post the Thanksgiving holiday, according to Giovanni Staunovo, commodity analyst at UBS Group AG.
It had already been an unusual week in the market. On Tuesday, the U.S. and other top oil consumers said they would release supplies from emergency reserves in a bid to curb rising energy costs. Saudi Arabia had said that it might scrap plans to increase production, which was led by the OPEC cartel. London's benchmark price of Brent bounced back above $80 a barrel.
That was before Omicron.
Asia and European trading saw a steady sell-off early on Friday, and prices were down 5% by mid-morning in London. The real excitement came in the U.S. hours.
The market went down ever since when oil broke through key technical levels - U.S. futures pierced their 100 day and 200 day moving averages. That gave the upper hand to algorithmic computer-driven trades on a day when many participants were away from the market.
The sell-off has been exacerbated by algo-driven trading as key technical levels broke down, said Fawad Razaqzada, an analyst at ThinkMarkets.
When prices fall heavily, banks often sell futures contracts in order to hedge themselves against losses from put options contracts that give the right to sell at a specific price. Banks sell puts to producers who want to protect against a bear market. This feedback loop, known as the negative gamma to options traders, was seen as a factor on Friday.
Dealers took down hedges and they are shorter put options than normal, so they must sell futures to hedge, said Ilia Bouchouev, a partner at Pentathlon Investments and former head of oil derivatives at Koch Supply and Trading.
New York's WTI futures slumped 14% from its pre-Thanksgiving close and London's Brent collapsed more than 12% at the worst point of the crash. By the close they both recovered slightly, but it was still the seventh worst one-day drop in history for London futures.
What happens next depends on whether the direst predictions for Omicron impact are realized.
Goldman Sachs Group Inc. said Friday that the move priced in a 4 million-barrel hit to demand over the next three months was nowhere close to the first lock-down, but more than enough to throw the market back into disarray. In any case, the Wall Street bank said that was excessive.
The crash is a buying opportunity because they expect prices to recover quickly when the U.S. market returns fully after the holiday and volumes return to normal. The outlook remains strong for the long term.
This is a huge overreaction in terms of the market, said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., in a Bloomberg Television interview. This is the worst possible scenario of market pricing. None of the Wildfires Are Getting Worse and One Chemical Company is Reaping the Benefits, and One Chemical Company is Reaping the Benefits.
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