WTI battered by South Africa Covid-19 variant fears, drops to $74.00/barrel area

• Crude oil battered as nations move to restrict travel amid fears of new South African Covid-19 variant.
• WTI drops all the way back to the $74.00 level, but are off lows in the $72.00s.

Crude oil markets have taken a battering on the final trading day of the week, with front-month WTI future prices trading around $74.00, a more near $4.00 or roughly 5.0% drop on the day. But WTI is well off earlier session lows around $72.75, where losses at the time stood at nearly 7.0% or over $5.0.

Risk appetite battered

Global risk appetite has taken a significant turn for the worse, with global equities under heavy selling pressure, risk-sensitive currencies and industrial commodities also being hit and safe-haven assets including sovereign bonds, safe-haven currencies and precious metals flying higher.

Market participants have been dumping risk assets in response to the latest news regarding a recently discovered Covid-19 variant in South Africa. Genomic analysis of the variant shows suggests that it might be the most evolved version of Covid-19 yet, with as many as 32 spike protein mutations. Early data on its spread in South Africa shows that it is rapidly outcompeting the delta variant. The scientific community and public health experts fear the new variant might be able to escape immunity acquired by past natural infection or vaccination, a notion which anecdotal evidence at this point supports.

Travel bans hit oil

In response to the raising of alarm bells in South Africa about this new variant, nations have been taking steps to implement travel restrictions. The UK and Singapore have put various African nations on their travel red lists and Israel has already implemented a travel ban to the region, while Japan is announced a general tightening of inbound travel restrictions. Market participants expect further restrictions to be forthcoming. The EU Commission is already mulling the proposal of an emergency travel ban on regions affected by the new variant, while the top US infectious disease export Anthony Fauci has said indicated that the US is in contact with South African scientists, though will not implement travel bans just yet.

Crude oil is highly vulnerable to travel bans as it would dent jet fuel consumption, which makes up a significant amount of global daily demand. This explains why the losses in crude oil markets have been comparatively more severe than in other asset classes such as equities. Various market commentators noted on Friday that the latest Covid-19 developments are likely to be a game-changer for OPEC+, who meet next week to decide on policy. The cartel is therefore highly unlikely at this point to continue with output hikes until there is more certainty with regards to the global health picture and regarding the level of restrictions that are going to placed on global travel.