Markets fall as virus variant concerns rise
▶ Brent and WTI drop more than 6% after producer group extends deal
Stock markets around the world underwent a sell-off yesterday because of fears over the spread of new Covid-19 variants.
In the US, the S&P500 index was trading 1.74 per cent lower at 8.20pm UAE time, while the Dow Jones Industrial Average was down 2.41 per cent.
European markets also closed lower, with the EuroStoxx 50 down 2.66 per cent, and France’s CAC 40 index down 2.54 per cent. In Asia, the Hang Seng Index closed 1.84 per cent lower and Japan’s Nikkei 225 index was down 1.25 per cent.
The sell-off is “all about the Delta variant, and investors are using this as a perfect excuse to push the markets lower”, said Naeem Aslam, chief markets analyst at broker Avatrade.
In the UK, as many Covid-19 restrictions were lifted on “Freedom Day” in England, the FTSE 100 index fell 2.34 per cent. The pound also fell sharply against the dollar to $1.3673.
Far from giving investors confidence, the removal of social-distancing curbs has seen it evaporate as sharply rising infection rates cause disruption to operations, said Susannah Streeter, senior investment and markets analyst at stockbroker Hargreaves Lansdown.
“From retail to manufacturing and hospitality, the warnings are coming thick and fast that mandatory isolation is leading to reduced business operating hours, a drag on sales and a reduction of output,” Ms Streeter said.
Oil markets also fell sharply following the Opec+ agreement on Sunday, which is set to increase supply by an extra 400,000 barrels per day.
Brent, the benchmark for two thirds of the world’s oil, dropped below $70 and was trading 6.06 per cent lower at $69.13. US gauge West Texas Intermediate fell 6.75 per cent to $66.96.
Cryptocurrencies also witnessed a decline with Bitcoin down 2.35 per cent at $30.725.44 and Ether trading 3.94 per cent lower at $1,823.37.
Analysts from Bank of Singapore said that a sell-off in equity markets “cannot be ruled out”.
Oil prices fell sharply after Opec+ ended weeks of deadlock and agreed to boost supply from August. Brent, the key international oil benchmark, cent fell below $70 to trade 6.06 per cent lower at $69.13 at 7.20pm UAE time. West Texas Intermediate was 6.75 per cent lower at $66.96.
Opec+ agreed to bring 400,000 barrels per day back to the markets in August and will revise baselines used to calculate quotas from May 2022, after requests by several countries, including the UAE.
Under the latest agreement, the UAE’s new production baseline will increase to 3.5 million bpd, from 3.1 million bpd previously. Other producers – including Iraq, Kuwait, Saudi Arabia and Russia – will also have higher baselines.
“Although the intention to increase production is a shortterm negative for oil prices, particularly as it coincides with growth fears sweeping markets this week, in the longer run, the ability of Opec+ once again to overcome their difference is a positive for prices,” said Jeffrey Halley, senior market analyst, Asia-Pacific at Oanda.
“If demand falls short of expectations, Opec+ more than likely has the discipline to modify production targets to support prices as well now, as necessary,” he added
Opec+, led by Saudi Arabia and Russia, extended its agreement until the end of December 2022. The group reached a consensus over the phasing out of 5.8 million bpd of withheld supply after weeks of deadlock and will review the pact at the end of the year.
Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, warned about “uncertainty” in the oil markets.
“We’re dealing with uncertainty. And if you are dealing with uncertainty, the first thing you need to do is to acquiesce to the concept that you cannot predict uncertainty,” he said after the meeting.
In spite of additional expected output from Opec+, global oil demand growth is still expected to outpace supply, “resulting in a further drawdown in inventories”, said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“The expected tight oil market fundamentals are likely to keep oil prices supported and we see Brent averaging $73 per barrel in [the second half of this year].”
Opec continues to maintain its demand growth forecast for crude at almost 6 million bpd for 2021, leaving the estimate unchanged in its July report for the third consecutive month.
Total global oil demand is on track to reach 96.6 million bpd, the group said in its latest monthly market report.
Longer-term, oil prices are likely to continue their rise as mobility restrictions ease and demand for energy rises.
“The slow pace of production growth indicates that producers are comfortable with current oil prices and are likely to be concerned about the pace of economic recovery as new coronavirus variants emerge,” said Naeem Aslam, chief market analyst at AvaTrade.
“Therefore, it is uncertain whether the planned rise in oil supply will hinder a rise in oil prices as demand continues to rise.”
After the Opec+ decision to boost supply, Brent, the benchmark under which two thirds of oil globally trades, is still headed towards $80 per barrel as demand is expected to outpace supply, said Giovanni Staunovo, commodity analyst at Swiss bank UBS.