The commodity sector traded lower for a sixth straight week with continued losses in energy and metals, both precious and industrial, being only somewhat offset by another week of gains across the agriculture sector. Apart from recent dollar strength, renewed Covid-related lockdowns in Europe and the risk of a slowdown in China, the world’s top consumer of raw materials, markets were rocked on Friday on the discovery of a new variant of the coronavirus.
The new Covid variant, with a scientific description of B.1.1.529 but no Greek letter yet designated, has been identified in South Africa and observers fear that its significant mutations could mean that current vaccines may not prove effective, leading to new strains on healthcare systems and complicating efforts to reopen economies and borders.
These fears helped send a wave of caution over global markets on Friday with stock markets around the world slumping and US Treasury yields reversing course after rising earlier in the week on increased risk that central banks would speed up their normalization efforts to combat surging inflation. In forex, the Japanese yen jumped and the dollar, which had reached a 16-month high earlier in the week, reversed lower thereby challenging recently establish long positions.
Gold recovered after taking a 70-dollar tumble earlier in week when a break below the key $1830 technical level triggered selling from recently established hedge fund longs. Crude oil slumped following a week of high drama in the energy market which started with the US-led coordinated release of oil from strategic reserves. A move that raised concerns about a counterstrike from the OPEC+ group of nations who are due to meet on December 2 to set production targets for January and potentially beyond.
Crude oil was heading for a fifth straight week of losses, with the move primarily driven by worries that the new South African virus strain could once again led to lockdowns and reduced mobility. The Stoxx 600 Travel and Leisure Index has lost 16 per cent during the past three weeks with renewed lockdowns in Europe potentially spreading to other regions. Before then, the US coordinated release of crude oil from strategic reserves had driven prices higher in anticipation of a countermove from OPEC+.
The OPEC+ alliance called the SPR release “unjustified” given current conditions and as a result they may opt to reduce future production hikes, currently running near 12 million barrels per month. The group will meet on December 2, and given the prospect for renewed Covid demand worries adding to the assumption of a balanced oil market early next year, OPEC+ may decide to reduce planned production increases in order to counter and partly offset the U.S. release.
With these developments in mind, the only thing oil traders can be assured of is elevated volatility into the final and often low liquidity weeks of the year. Having broken below the July high at $77.85, little stands in the way of a revisit to trendline support from the 2020 low, currently at $74.75.
However, we maintain a long-term bullish view on the oil market, although now potentially delayed by several months or quarters, as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.