In case you are wondering what this title means, let me just take a moment to explain. These are about 2 versions of Black Fridays, with two distinctly different implications. In the US and in the West, the Friday after Thanksgiving Day is celebrated as Black Friday. That is when some of the biggest online stores and retail stores hand out generous discounts to lure customers. This is Black Friday with positive connotations. Incidentally, 26th November was actually Black Friday, marking the start of the Christmas shopping season.
It was also a Black Friday of a different kind. It is said that stock market crashes normally happen on Friday or Mondays. That is how the term Black Friday and Black Monday came about. There is no logic to it but that is how it has happened in the past. On 26th November, as the Western world was busy with Black Friday shopping deals, global markets crashed. The crash was led by equities and oil. It was about B.1.1.529 virus variant.
What exactly is the B.1.1.529 all about?
The first traces of the B.1.1.529 virus were found in South Africa and was detected in people in Europe and Hong Kong who had recently travelled to South Africa. UK, Singapore, Israel and most of Europe have already put up stringent restrictions on travel to and from the Southern African nations. It is considered to be a mutated version of COVID; not only more lethal but also less impacted by the vaccination.
The WHO is expected to confirm the enormity of the B.1.1.529 virus strain over the weekend but the markets are not taking chances. There was a clear rush of money away from riskier assets like oil and equities towards safer havens like DM bonds and gold. The markets virtually panicked after South African scientists said they had detected a new variant of COVID-19 that could prove more transmissible.
And the panic is showing in pre-emptive action
There is a reason for the panic. The B.1.1.529 variant of COVID-19 has an unusual constellation of mutations. In layman’s language, this means that the human body's immune response may not kick in and therefore vaccines may be less effective against this variant. One has to await for the final word from the WHO, but the panic reactions have started coming in thick and fast.
The UK has taken the initiative to ban flights from 6 African countries in response to worries about the impact of the new B.1.1.529 variant. The markets are obviously worried about the impact on economic growth. It is not just about the UK but other major countries in Western Europe like Germany, the Netherlands and Australia which have already announced lockdowns. In the last few years, Europe has received the largest number of African immigrants so the panic is understandable.
Oil crashes over 10-12% in response to the B.1.1.529 variant
Oil was probably representative of the panic but even the Dow lost over 1,000 points as markets across Western Europe cracked 2-3% in response. But let us come back to oil, which is the most visible manifestation of the panic in the market.
Chart Source: Bloomberg
On an intraday basis, the Brent Crude (CO1:COM) is down -10.33% while the US based WTI Crude (CL1:COM) is down -11.62% intraday on 26-Nov. That is one of the worst intraday falls seen in crude prices since we saw the oil prices crash in April 2020, a day when the WTI briefly dipped into negative zone. But, why has crude fallen so sharply?
Current economics of oil could change drastically
As per the latest data on demand and supply of oil, the average daily oil demand is around 98.40 million barrels while the supply is around 96.38 million barrels. In short there has been a consistent supply shortfall of about 2 million barrels on a daily basis and that has kept oil prices buoyant. That is Economics 101.
But that could change drastically for 3 reasons.
Europe is one of the major consumers of oil and if the travel and movement restrictions kick in then it is likely to drastically impact the demand for oil coming from Europe. That is immediate impact zone.
Secondly, the sudden disruption in movement would mean most industries would once again look at contracting their output leading to lower oil demand. That is why oil has slipped from a peak of $85/bbl to $73/bbl in the brent market.
Lastly, just a couple of days, the US had announced it would release 50 million barrels of oil from its strategic petroleum reserves (SPR). India, Japan and Korea are joining in and the total release in the market could be close to 75-80 million barrels.
Variant B.1.1.529 plus SPR release is the issue
Now the story is falling in place. The markets are expecting that even standalone, the 80 million barrels released would be enough to wipe out the oil surplus of 40 days. In addition, if the demand also contracts due to the B.1.1.529 variant, the current supply deficit could soon change into a supply surplus. It is this concern that is putting pressure on prices. After all, no commodity is as vulnerable to insufficiency of demand as oil is.