Brent prices and particularly calendar spreads are being hammered by the rising number of confirmed coronavirus cases around the world, which is threatening tougher international travel restrictions and renewed domestic lockdowns.

Brent spreads have slumped since the start of November, roughly two weeks after the seven-day average new case count started rising in the middle of October, according to global statistics compiled by Our World in Data.

There has been an inverse correlation between the two since the start of the year, as the ebb and flow of infections produces a relaxation and tightening of quarantines and other restrictions impacting oil consumption.

Brent’s calendar spread between futures contracts for February and March 2022 has slumped to a backwardation of just over 20 cents per barrel, down from a peak of more than $1.20 at the start of November.

The seven-day average number of new confirmed cases around the world has climbed to almost 620,000 per day from just 400,000 in the middle of October.

The new wave of infections is likely being driven by a combination of seasonal factors (respiratory diseases spread more rapidly in the northern hemisphere winter) and the emergence of the more transmissible Omicron variant.

The seasonal increase was widely anticipated by policymakers and traders, but the scale and suddenness was not, prompting an abrupt tightening of quarantines and social-distancing controls.

TIDE OF ANXIETY

Previous waves of new coronavirus infections in February-April and June-August also produced a softening of Brent calendar spreads.

But the most recent wave has coincided with growing concerns about rising inflation, the health of the global economy and the outlook for oil consumption in 2022.

And the earlier oil price rise between August and October has triggered a belated release of emergency reserves, led by the United States, adding to supply in the next few months.

The result has been a huge swing in spreads, accelerated and amplified by liquidation of a large number of hedge fund positions, most of them concentrated in nearby futures contracts.

If coronavirus behaves like other respiratory infections, the number of new cases is likely to continue rising for at least another month, though social distancing, health regulations and vaccinations may blunt the increase.

While new cases are accelerating, pressure for greater restrictions on the number of social contacts and cross-border movements will continue to weigh on forecasts for oil consumption.

Brent prices and calendar spreads are therefore likely to remain under pressure until there are clearer signs the new wave is being brought under control by some combination of controls, the arrival of spring weather, or growing acquired immunity in the first quarter of next year.

Reuters by David Evans, December 17, 2021