Crude oil price tumbles amid fears of new COVID-19 variant

Raymond James Analyst Pavel Molchanov assess crude oils' trading performances being attributed to the South African COVID variant.

Video transcript

- We want to take a look at the markets here. The Dow off of its lows, but still down over 850 points. S&P 500 down more than 1 and 3/4 of a percent, and the NASDAQ catching up just a little bit, just behind the S&P 500.

Now, on the Wi-Fi Interactive, also want to take a look at the bond market because the five-year T note yield down a whopping 15 basis points. You don't see these kind of big move-- moves often. The 10-year T note down a little bit less, 13 basis points. And the 30-year, that is down 10 basis points.

But the market that we want to focus on right now, WTI crude futures, off 10%. And this is the worst day since late April 2020. And we want to talk about it all with Pavel Molchanov, Raymond James analyst. And thank you for joining us here today.

Let's begin with crude oil, because at $70, we haven't seen these prices in quite some time. A lot of dynamics going on here. We've got the Strategic Petroleum Reserve. That announcement came only days ago. We got an OPEC plus meeting next week. Just kind of break down the oil market as you see it, please.

PAVEL MOLCHANOV: Sure. Well, oil right now is the lowest it's been since the delta variant was surging in the spring and summer of this year. And of course, now we have this new variant, B11529, from Southern Africa. We have seen this movie before. In fact, almost exactly a year ago, we saw the same surge of governments shutting borders, banning flights in response to what became known as alpha, which was the UK variant. And since then, you know, alpha, beta, gamma, delta, this is now kind of the fifth major one.

You mentioned the Strategic Petroleum Reserve being released. You know, that's a rounding error in the grand scheme of things. It's a very minor kind of non-event. Clearly, the current situation with B11529 is worrisome. It's very early days, you know, it's hard to predict exactly how needle-moving this new variant will become on a global scale, but governments are acting first and asking questions later, which is why, you know, the global travel industry, which of course uses a lot of oil, is reeling today.

- And Pavel, take-- mentioning that travel industry, certainly a lot of those names, airlines all off pretty significantly. Cruise lines are taking a hit, taking a look at names like Expedia, and the list goes on, all in the red. Do you think that we will likely see more selling within this sector, over at least the next couple of days, until we get more clarity just in terms of how serious and how-- I guess just serious this new variant is, potentially, just in terms of what it means for COVID going forward?

PAVEL MOLCHANOV: Well, it's-- today, it's a classic knee-jerk reaction. Keep in mind, if we're talking about US equities in particular, this is also a post-Thanksgiving day. You know, traditionally kind of low volume. So you know, you have this exaggerated reaction. You know, there might be a bounce, you know, perhaps early next week, if the situation with the new variant is not as dire as what the market seems to be pricing in.

You know, for example, there was a variant called mu from Peru and Ecuador, and there were some fears about that this past summer, but mu ended up being very minor on a global scale. So perhaps this new one will, you know, will be kind of along those lines. You know, with oil down almost 10% and, as you said, the market down sharply in equities, the industry is pricing in kind of a worst-case scenario here.

- Well, and I want to get back to the bond market because some huge volatility there, and not just today. I mean, bond yields have been moving up large, up big and down big, almost on a day-to-day basis. It seems like the rates market still trying to figure out the calculus at the Fed maybe. I'm just wondering what you're reading in today's price action in these yields that we're seeing there, five-year down 15 basis points.

PAVEL MOLCHANOV: Well, again, I just mentioned the entire financial community seems to be assuming that, you know, B11529 will be as big a deal for the global economy, right? Holistically, economic activity, you know, transportation, travel, consumer behavior. And ultimately, of course, all of this can be reflected in bond yields, as well.

You know, up until the last, you know, 48 hours, the big concern in the economy was, you know, too much demand, right? Inflation, supply chain tightness, et cetera. And now comes news that, well, perhaps there are other risks out there, as well. If consumers pull back in response to the new variant, pull back on the travel patterns, pull back on spending, then, of course, we have a very different economic landscape compared to what we would have said as recently as Wednesday.

- Pavel, I know it's still early to tell, but how do you see this affecting growth going forward? I mean, how big of a risk, how big of a red flag is this, at least right now?

PAVEL MOLCHANOV: It's extremely early, right? So what do we know about the variant? We know that its-- this so-called spike protein is very unusual. That may lend itself to greater transmissibility. You know, delta was a prime example of that earlier this year.

So let's go back to delta. Between the emergence of delta in April and when the pandemic really peaked, you know, took about 100 days. It depends on the country we're talking about, but about 100 days. So if this were to be as bad as delta, in terms of worsening case counts and hospitalizations in the pandemic, you know, then presumably the impact would be pretty severe in December, January, February, subsiding by March. Yeah, we cannot know that for sure, but that would be the timetable, you know, we're potentially looking at.

- And we're going to have to leave it there, but we appreciate you stopping by. Pavel Molchanov, Raymond James analyst.