Oil strengthens as Omicron fears subside
The Omicron variant’s impact may have been overstated if oil markets are anything to go by this week.
Crude oil trading
Oil outlook still strong post-Omicron
When the world first discovered the Omicron COVID-19 strain last week, danger signs started flashing globally.
Big questions were asked: would this new variant be even deadlier than those that came before? Is the world really going to have to re-enter lockdown? Will normality ever return? Although it’s still early days in Omicron’s development, it may not be the apocalypse after all.
This is all good news for crude oil.
While infections are increasing, it appears the hospitalisation rate in developed nations has not dramatically increased following Omicron’s emergence.
“Though it’s too early to really make any definitive statements about it, thus far it does not look like there’s a great degree of severity to it,” US COVID advisor Dr. Anthony Fauci said. “Thus far, the signals are a bit encouraging. But we have really got to be careful before we make any determinations that it is less severe, or it really doesn’t cause any severe illness, comparable to Delta.”
A global lockdown may not be on the way. Oil demand may still stay high into January 2022.
WTI futures were in the green as of the morning of Tuesday December 7th. The Texan benchmark is up 2.35% on the day, trading for around $71.69 at the time of writing.
Brent crude futures were also up around 2% on the same day, trading hands for $75.08.
The Omicron panic-induced sell-off triggered last week may have come to a halt. Momentum is back with the bulls for now, although it might take a while for oil to reach recovery around the $75-80 level just yet.
OPEC+ sticks to the plan
If OPEC+ was worried about omicron smashing oil, the cartel didn’t let it show at last week’s OPEC-JMMC meetings.
There was much talk around the markets that OPEC members were split between keeping production increase coming or recalibrating them in line with an expected fall in demand caused by Omicron.
As it stands, OPEC and allies have committed to their now customary 400,000 bpd monthly increase. The next output hike will take place in January.
While prices recorded gains on Thursday December 2nd, following the OPEC meeting, the cartel will still have to proceed with caution. It could be creating an oil glut.
For one thing, President Biden and the US have coordinated with the UK, China, India, Japan, and South Korea to release crude from their strategic oil reserves. As much as 66 million barrels will be released onto markets following this move.
Biden has been trying to get OPEC+ to pump more oil for most of the second half of the year as American gasoline prices increased.
OPEC+ members may not be meeting their production quotas either.
A recent Reuters survey showed OPEC pumped 27.74 million barrels per day in November, up 220,000 barrels from October, but below the 254,000 increase allowed for OPEC members under the OPEC+ agreement.
Even so, Saudi Arabia appears confident in the strength of oil markets going forward. The OPEC chief and global production powerhouse hiked the price of its Arab Light blend by $0.60 earlier in the week – a sign it believes demand will stay strong as 2021 ends.
A quick look at US crude inventories data
A new EIA report is due on Wednesday this week, but ahead of that here’s a quick overview of the current situation.
According to the EIA report for the week ending November 26th, US commercial crude oil inventories decreased by 0.9 million barrels from the previous week.
At 433.1 million barrels, US crude oil inventories are about 6% below the five year average for this time of year. Total motor gasoline inventories increased by 4.0 million barrels last week and are about 5% below the five year average for this time of year.