Oil taking it on the chin as new COVID-19 variant throws a massive wrench into the works

Oil down by nearly 6% and briefly clips below $74

Invest in yourself. See our forex education hub.

US president Biden may get his wish of lower oil prices but it isn’t exactly how one might expect it to come about in trading this week.

The SPR release news was underwhelming but oil is now down by well over 5% on the day and testing its 100-day moving average (purple line) as the new COVID-19 variant from South Africa is threatening to reignite pandemic fears across the globe.

The key thing to note here is that while there is plenty of talk of more supply coming into the market for oil, the bullish undertones that have been building up price are mostly hinging on the fact that demand conditions are going to improve amid a global reopening.

But if the new COVID-19 variant threatens to close borders and dampen global travel, we’re pretty much seeing a reset to oil market fundamentals back to 6-9 months ago perhaps.

That will undo a lot of the bullish thinking in oil over the past 2-3 months and the technicals are also starting to look a little shaky as such.

I haven’t been shy in being bullish about oil prices but the latest curveball here does warrant some serious consideration and it may take a few weeks to sort out.

It all depends on how serious this new COVID-19 variant will turn out to be. And nobody can say for sure what exactly that may be for now at least.

There is some added support for oil just below the 100-day moving average, in the form of the 50.0 retracement level @ $73.58. But below that, a push back towards $70 may be on the cards and only then we may see buyers start to dip their toes back in while reassessing the latest developments across the market.