Oil jumps 5%, recouping some losses following worst day of the year

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  • Oil prices jumped again on Monday, making up for some of Friday’s heavy losses.
  • US oil slid 13% on Friday for its worst day since April 2020, as the impact of the Omicron variant on demand feared a drop in prices.
  • “Friday’s price drop was excessive,” said Commerzbank analysts.

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Oil prices jumped on Monday as traders bet that Friday’s sharp sell-off, fueled by fears that the new Omicron Covid variant will curb demand for petroleum products, was overdone.

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West Texas Intermediate crude futures, the US oil benchmark, were trading up $3.31, or 5.3%, at $71.48 a barrel at around 8:15 a.m. on Wall Street. The move propelled the contract back above $70 after a break below that key level on Friday.

The WTI fell 13% on Friday for its worst day since April 2020, and closed below its 200-day moving average – a closely followed technical indicator – for the first time since November 2020.

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Brent crude, the international oil benchmark, rose 4.3% to $75.90 on Monday. The contract lost 11.55% on Friday, and along with WTI posted losses for the fifth consecutive week.

“Friday’s price drop was excessive,” said Commerzbank analysts. “Certainly, the Omicron version is raising concerns about demand, but it is not yet possible to give any serious data on exactly what impact this will have on demand,” the firm said.

Oil was trading lower even before Friday’s sharp decline after WTI hit a seven-year high above $85 in October. Brent crude had hit a three-year high last month.

Looking at oil’s strong 2021 rebound, analysts at RBC said some of Friday’s selloff could be attributed to traders closing in on profits.

“At least part of the air pockets on Friday were an act of mitigation, potentially for the year,” the firm said in a note to customers on Sunday. “After 11 months of strong pricing, oil traders would prefer to guard and protect the nest egg, rather than fighting the tide of moving market events like COVID, for another month at the end of the year.”

Oil’s whipsaw moves come ahead of a crucial meeting between OPEC and its oil-producing allies, where the group will decide on production policy for January. Currently, the alliance, known as OPEC+, is returning 400,000 barrels per day to the market every month as it lifts the historic production cuts implemented in April 2020 as the pandemic eased demand for petroleum products.

In addition to the latest price action, the group will also evaluate the supply and demand trajectory, as the US and other countries last week announced plans to tap strategic petroleum reserves in an effort to curb an uptick in fuel costs. The Biden administration said the US would release 50 million barrels from the SPR.

Wall Street is divided over what OPEC+ might announce when they meet on Thursday. “With the uncertainty over Omicron, we expect OPEC to meet its target of increasing production and keeping its quotas flat in January,” Morgan Stanley said in a note to clients.

Citi, on the other hand, believes OPEC+ will “maintain the line, and increase its planned 400-kb/d quota.”

— CNBC’s Michael Bloom contributed reporting.

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