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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

Once again Thanksgiving oil markets lived up to their notorious holiday reputation plunging on light holiday volume in response to reports of a new Covid Variant found in South Africa. Oh, sure the reports of this strain are concerning but a 6.5% one-day drop?

Fox News reported that The World Health Organization is holding a meeting Friday to discuss the dramatic rise in COVID-19 cases in South Africa that has been blamed on a new variant of the virus. Joe Phaahla, South Africa’s minister of health, identified the new variant as B.1.1.529 and said it seems highly contagious among young people.

The BBC reported that the new variant seems to be the most heavily mutated so far in the outbreak. James Gallagher, the health correspondent, wrote that one scientist described the variant as “horrific.” He said the meeting of the WHO will likely result in the variant receiving a Greek code-name, like the Delta variant.

The Wall Street Journal reported that dozens of countries restricted travel to and from South Africa and neighboring nations Friday, hoping to contain a fast-spreading new variant of the coronavirus that scientists say may be more contagious and could render the current crop of Covid-19 vaccines less effective.

While scientists say they are still figuring out the exact effects of the more than 50 mutations they have identified in the new variant, it has been driving a sharp rise in infections in South Africa over the past two weeks, albeit from very low levels. It has also been detected in Botswana and two travelers in Hong Kong. Israel, one of the countries that restricted travel from southern Africa, said Friday it had identified the B.1.1.529 variant in a traveler from Malawi and was investigating whether it had also infected two others.

For oil, traders are putting the fear of this new strain ahead of the reality. While we have to take it seriously more than like oil should find a floor in the $72 area. Like I have warned that light volume on Thanksgiving historically distorts and overdoes these moves.  The worries are still that US volume today will be light but the markets look to be ahead of the risk even though we are not even close to understanding how bad this new variant might be.

Yet the move will give pause to OPEC plus whose meets next week. Now with this Covid fear price drop along with concerns of a supply surplus next quarter will give them enough political cover to pause the oil production increase in a way that won’t so much now look like a retaliatory move against the Biden Administration. As far as the prices drop goes, I am sure the Biden Administration will take a victory lap and we should let them because let us face it, they have had so few.

Price-wise for oil this should be like a Black Friday Discount sale. Fundamentally oil looks cheap near $72. While I can not tell how bad this variant might be and whether it will lead to massive lockdown but if it does not then we are probably going to set the year low price today. Of course, if this variant does turn out to be a lot worse than the Delta variant then all bets are off.  Still, if I had an upside price risk I would use this break as a hedging opportunity.

Natural Gas on the other hand is looking quite bullish. Lockdown fears could hurt demand but not as bad as oil. The weather looks like the cold will set in and we may see nat gas make a nice run.

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Phil Flynn

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