ASX falls; global markets begin rallying

RBC Capital Markets says the oil market’s reaction to the new omicron variant appears to be overblown, the implied demand fallout deemed “excessive” by the firm’s commodity team.

On Friday, West Texas Intermediate crude tumbled by 13.1 per cent while Brent crude slid 11.6 per cent.

RBC said the fall in Brent implied the market was pricing in 3.94 million barrels a day of demand destruction over the next month, way beyond what it believed was likely.

“While lockdowns, or partials may dent demand somewhat, the volumes are far from large. For example, Austria, the most notable country to issue a full government regulated lock down, consumes a mere 300,000 barrels a day,” said RBC Capital Markets commodity strategist Michael Tran.

“Let us try to put this another way: Austrian oil demand could fall to zero, and that demand destruction would be less than 1.5 per cent of aggregate US oil consumption.

“Several countries have implemented travel restrictions from a handful of African nations. Let us stretch the scenario further, if the entirety of the OECD European countries grounded their planes and jet fuel demand went to zero, that represents a demand destruction hit of a mere 1.2 million barrels a day.”

The market has already shown scepticism, with both Brent and WTI crude rallying on Monday, recovering some of its losses.

RBC said its mobility tracker revealed that the intermittent flare-ups of COVID-19 across multiple countries were no longer materially impacting oil demand over prolonged stretches, outside of government imposed regulations.

The broker said a portion of Friday’s sell-off was due to de-risking, with traders happy to take profit rather than ride out a volatile period.

“At least part of the air pocket lower on Friday was a function of winding down risk, potentially for the year,” said Tran.

“Following a strong 11 months of pricing, oil traders would rather de-risk and protect the nest egg, than fight the tide of market moving events like COVID for another month into year-end.”