Prices of crude oil and oil-related ETFs are falling on Monday after a new strain of Covid that was uncovered in the U.K. generated new travel restrictions across Europe and worries that there may be more lockdowns globally, potentially hampering demand for fuel.
Futures tied to West Texas Intermediate, the key U.S. crude measure, sank as low as $46.25, or over 6% Monday, before scrambling back toward $48 a barrel in early afternoon trade. International bellwether, Brent crude oil, tumbled 4.1% to $50.10 a barrel, its sharpest one-day drop since October.
The U.K. government said the new strain seemed to be more contagious than the prior known strains, disseminating 70% faster than earlier mutations. It has locked down parts of the country, including London, as a result.
“The new variant of the virus and new travel restrictions have increased anxiety again,” said Norbert Rücker, head of commodities research at Julius Baer. “The road back to normal has its bumps and this seems to be the latest one.”
Crude oil ETFs are under pressure from the falling futures markets Monday. The United States Oil Fund (USO) declined 2.69% while the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 2.21% as of just before 2PM EST.
Prior to the fall Monday, crude oil and crude ETFs had been in a strong uptrend for nearly two months, which analysts don’t necessarily see an end to anytime soon.
“The main trend is up according to the daily swing chart. A trade through $49.43 will signal a resumption of the uptrend. The main trend will change to down on a move through $45.14. The minor trend is also up. Monday’s lower-low turned $49.43 into a new minor top. On the downside, the first support is the long-term Fibonacci level at $46.04,” wrote James Hyerczyk of fxempire.com.
There are other experts who see a more protracted recovery for oil, which could encounter some headwinds now that it is approaching the pivotal $50 per barrel level.
“A full comeback won’t happen overnight, despite the unbridled enthusiasm of traders…For now, oil consumption still remains depressed as governments impose new travel restrictions to slow the spread of the virus during the holidays — a season that in any other year would be associated with greater demand for petroleum products. Gas prices are under $2 a gallon across much of the country,” said Dan K. Eberhart, CEO of Canary, an independent oilfield services company in the United States, in a CNN opinion piece.
While there are a number of options for investors looking to use ETFs to express a long bias, such as the Invesco DB Oil Fund (DBO), savvy investors looking to short oil over supply concerns could consider the ProShares UltraShort Bloomberg Crude Oil (SCO), which has gained over 4.49% Monday.
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