Oil Prices Fall amid Worries over New Coronavirus Strain

A new variant of the coronavirus is ravaging Britain. What's worse, it is spreading to Europe and other countries. Hong Kong and several European countries have announced a ban on all passenger flights from Britain. Cathay Pacific has decided to cancel the following passenger flights to Britain. British officials claimed the new variant was “out of control”, warning the deadly serious situation.

The news has intensified feelings of panic and anxiety in the financial markets. The pandemic is getting worse worldwide, with Christmas just approaching. The financial markets are worried that if people in Europe and the US gather at parties to celebrate Christmas, the pandemic will surge shortly after. This was the case in the US around Thanksgiving Day, after which a series of released economic data turned sour drastically, taking a toll on the DXY repeatedly. By this account, the UK's economic data will probably see a sharp deterioration. Currently, the Brexit trade talks remain deadlocked since neither party is willing to make concessions. All these negatives will put the pound on track for steeper downtrend.

Besides the pound, oil in the commodity market is expected to be another victim of the new variant. Now that the variant is up to 70% more contagious than the previously known form, other countries in Europe will also find things out of control and go back to the full-scale lockdown. As a result, the demand for crude oil will sharply decline amid bans on flights. According to data from the American Petroleum Institute, crude stocks in the US rose by 2.7 million barrels in the week to Dec. 18 to about 497.7 million barrels, compared with markets' expectations for a draw of 3.2 million barrels. These latest prints accurately reflect the shrinking demand, which will amplify oil inventories and which is attributed to the resurgent pandemic.

With that said, I believe the short-term oil prices will see enduring weakness amid the pandemic. In the medium run, the Sino-US joint efforts in reducing carbon emissions will be another tough challenge. Promoting renewable energy sources as a substitute for conventional energy sources will hamper the demand for crude oil and natural gas, with far-reaching effects. The key support for WTI now stands at $43.93, where a breach below will open the door for further downsides.