Oil Price Fundamental Daily Forecast – COVID-Related Lockdowns in Europe, Strong US Dollar Sink Crude Prices

U.S. West Texas Intermediate and Brent crude oil futures are trading lower on Friday after breaking sharply from their intraday highs earlier in the session. Weighing on prices were concerns that a fresh surge in COVID-19 cases in Europe would threaten to slow the economic recovery. A jump in the U.S. Dollar also weighed on demand forecasts while a potential release of crude reserves by major economies raised concerns over too much supply.

At 14:23 GMT, January WTI crude oil is trading $76.29, down $2.12 or -2.70% and January Brent crude oil is at $79.07, down $2.17 or -2.67%.

Perhaps contributing to the early volatility is the expiration of the December WTI futures contract and the rollover into the January WTI futures contract.

Fresh Concerns Over European Economic Recovery as Austria Reimposes Full Lockdown

Austria will become the first country in western Europe to reimpose a full coronavirus lockdown this autumn to tackle a new wave of infections, and will require its whole population to get vaccinated as of February, the government said on Friday.

With cold weather setting in across Europe, governments have been forced to consider reimposing unpopular lockdowns against continued COVID-19 contagion. Austria introduced a lockdown for those who are not fully vaccinated on Monday but since then infections have continued to set new records. The Netherlands is now in partial lockdown with bars and restaurants closing at 01:00 GMT.

With new COVID-19 cases expected to spread throughout Europe, crude oil traders are already starting to price in the possibility of demand destruction due to economic slowdowns.

Strong US Dollar Weighs on Foreign Demand

The U.S. Dollar was trading higher against a basket of major currencies on Friday, led by a plunge in the Euro. Since crude oil is a dollar-denominated asset, the rise in the greenback dampened demand from holders of foreign currencies.

The Euro is trading sharply lower against the U.S. Dollar on Friday after European Central Bank President Christine Lagarde said that inflation in the Euro Zone will fade so the ECB should not tighten policy as it could choke off the recovery, and hinted at continued bond purchases next year, Reuters reported.

Inflation in the Euro Zone hit 4.1% in October, pushed up by higher energy costs, and is expected to stay above the ECB’s 2% target next year as suppliers strained by the pandemic cannot keep up with the reopening of the economy.

But Lagarde insisted the ECB should not react to the current inflation spike.

“When inflation pressure is expected to fade – as is the case today – it does not make sense to react by tightening policy,” she said. “The tightening would not affect the economy until after the shock has already passes.”