Bloody Friday

The crude futures market experienced a huge drawdown on Friday of close to 13% intraday, as the news that the omicron COVID variant was spreading rapidly hit the market amid thin liquidity and January being close to expiry. The price drop was further magnified by option dealers adding momentum due to their net short gamma position, forcing them to sell aggressively prompt prices to limit their delta exposure. This move has been comparable to late 2018, when the market tanked from 85 $/b to 55 $/b at the prompt during more than a week, allegedly due to option-related momentum.

Diesel cracks also dropped at the same pace, to reach a paltry 8.5 $/b at the prompt for ICE Gasoil cracks. Yet, crude time spreads remained supported, especially ICE Brent, indicating that there was little time arbitrage between months, as would imply news such as the resurgence of a new COVID variant. The drop in prices was sufficient for OPEC to reschedule its monthly meeting, due early this week. The technical committee will likely meet on Tuesday, while the ministerial meeting will occur on Wednesday. It is unlikely that they will delay their planned output increase, but their cautious stance was to address these types of demand shocks.