U.S. West Texas Intermediate and international-benchmark Brent crude oil futures struggled all week as surging cases of the Omicron coronavirus variant raised fears that new restrictions may hit fuel demand.
Unfortunately for bullish speculators, these struggles are likely to continue this week as Omicron continues to spread at a rapid pace, creating worries that governments’ will impose new restrictions to prevent hospitals from being overwhelmed by new patients.
This is likely to lead to demand destruction at a time when U.S. production is expected to rise. Simply stated, low demand, high supply is bearish so traders have to make position adjustments by selling. This is likely to continue until prices hit a value zone or until traders price in damage expectations.
This wasn’t the case at the start of the week when OPEC remained upbeat on 2022 oil demand, even saying Omicron impact will be mild. However, by the end of the week, the price action showed traders were leaning more toward the forecast from the International Energy Administration, which showed oil supply would top demand.
Last week, March WTI crude oil futures settled at $70.35, down $0.87 or -1.22% and March Brent crude oil finished at $73.52, down $1.39 or -1.89%. The United States Oil Fund ETF (USO) closed at $50.74, down $1.13 or -2.18%.
Will New Developments Force OPEC to Make Lower Adjustments to Demand Forecast?
Last Monday, OPEC raised its world oil demand forecast for the first quarter of 2022 and stuck to its timeline for a return to pre-pandemic levels of oil use, saying the Omicron coronavirus variant would have a mild and brief impact.
In a monthly report, OPEC said it expects world oil demand to average 99.13 million barrels per day (bpd) in the first quarter of 2022, up 1.11 million bpd from its forecast last month.
“Some of the recovery previously expected in the fourth quarter of 2021 has been shifted to the first quarter of 2022, followed by a more steady recovery throughout the second half of 2022,” OPEC said in the report.
“Moreover, the impact of the new Omicron variant is projected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges.”
IEA Says Demand will Temporarily Slow, but Oversupply is New Concern
A surge in COVID-19 cases and the emergence of the Omicron variant will dent global demand for oil, the International Energy Agency (IEA) said last Tuesday, but the broader picture is one of the increasing output set to top demand this month and soar next year.
“The surge in new COVID-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway,” the Paris-based IEA said in its monthly oil report.
“New containment measures put in place to halt the spread of the virus are likely to have a more muted impact of the economy versus previous COVID waves,” it said.
Meanwhile, the United States will account for the single biggest increase in output for a second month running, the IEA said, as drilling picks up there. Next year, Saudi Arabia and Russia could also set records for annual production if the OPEC+ group to which they both belong fully unwinds its agreed production curbs.
While new Omicron cases work through the global economy, we expect demand to take a hit. Probably not as bad a previously reported demand destruction, but enough for OPEC and its allies to take notice. When the group was formed, it cited price stability as one of its mandates.
At its recent meeting in early December, OPEC+ reconfirmed its production adjustment plan and raised monthly overall production by 400,000 barrels per day in January 2022. But it also said that members agreed that the “meeting shall remain in session pending further developments of the pandemic and continue to monitor the market closely and make adjustments if required.”
If prices continue to decline or volatility remains at heightened levels, I wouldn’t be surprised if OPEC+ passes on the expected 400,000 barrel per day increase at its January 4 meeting.