US oil prices slump over 5% on Covid-19 vaccine efficacy worries

By Stephanie Kelly

NEW YORK (Reuters) -Oil prices tumbled on Tuesday, with U.S. crude futures falling by more than 5%, after Moderna's chief cast doubt on the efficacy of COVID-19 vaccines against the Omicron coronavirus variant, spooking financial markets and heightening worries about oil demand.

The head of drugmaker Moderna Inc told the Financial Times that COVID-19 vaccines are unlikely to be as effective against the Omicron variant of the coronavirus as they have been against the Delta variant.

Brent crude futures fell $2.87, or 3.9%, to settle at $70.57 a barrel, after hitting an intraday low of $70.22, their lowest since August.

U.S. West Texas Intermediate (WTI) crude futures ended $3.77, or 5.4%, lower at $66.18 a barrel. The benchmark dropped to a session low of $64.43, also its lowest since August.

This month, oil prices have dropped by the most since March 2020, the start of widespread lockdowns because of the pandemic. Brent fell this month by 16.4%, while WTI fell 20.8%.

"The threat to oil demand is genuine," said Louise Dickson, senior oil markets analyst at Rystad Energy. "Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022 as governments prioritize health safety over reopening plans, of which there is already telltale evidence, from Australia delaying its reopening to Japan banning foreign visitors."

Oil plunged around 12% on Friday along with other markets on fears the heavily mutated Omicron variant would spark fresh lockdowns and dent global oil demand. It is still unclear how severe the new variant is.

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding up its "taper" of large-scale bond purchases at its next policy meeting, amid a strong economy and expectations that a surge in inflation will persist into the middle of next year.

Following Powell's comments, oil prices, especially U.S. crude futures, fell alongside major U.S. stock indexes, which fell more than 1%. [.N]

Premiums on benchmark crude oil futures contracts for loading in one month over contracts for loadings in six months' time - a metric closely watched by traders - narrowed dramatically on Tuesday.

The higher the premium on front-month loading contracts over later-loading contracts, a market structure known as backwardation, the stronger the view that the market is in a supply deficit.

Brent's six-month backwardation narrowed to around $1.50 per barrel, the lowest since March. WTI's six-month backwardation fell to about $1.90 per barrel, its lowest since September.

On the horizon for the oil market, expectations are growing that the Organization of the Petroleum Exporting countries, Russia and their allies, together called OPEC+, will put on hold plans to add 400,000 barrels per day (bpd) to supply in January.

"We think the group will lean towards pausing output hikes in light of the Omicron variant and the oil stockpile release by major oil consumers," Commonwealth Bank commodities analyst Vivek Dhar said in a note.

Pressure was already growing within OPEC+, due to meet on Dec. 2, to reconsider its supply plan after last week's planned release of emergency crude reserves by the United States and other major oil-consuming nations to address soaring prices.

"Following the global strategic reserve releases and the announcement of dozens of countries restricting travel... OPEC and its allies can easily justify an output halt or even a slight cut," OANDA analyst Edward Moya said in a note.

The increase in OPEC's oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found on Tuesday, bringing a lack of capacity in some producers into focus ahead of the meeting this week.

Ahead of weekly industry data after the market closes, analysts in a preliminary Reuters poll estimated on average that crude stocks decreased 1.2 million barrels last week. [EIA/S]

(Reporting by Stephanie Kelly in New York; additional reporting by Dmitry Zhdannikov, Noah Browning, Sonali Paul and Florence Tan; Editing by Marguerita Choy and Louise Heavens)