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A new COVID-19 strain is putting big pressure on oil markets worldwide.

Oil trading

New COVID-19 strain puts pressure on oil

Just when you thought it was safe. Just when you thought the pandemic was under control. Just when you thought normality was in sight. A new COVID-19 variant has been found, and it’s already causing chaos in the oil markets.

The Omicron variant, a new highly contagious COVID strain, has been found and is already spreading across the world. The Delta variant was bad enough, but are oil markets resilient enough to withhold the Omicron assault?

Perhaps not. Crude oil futures took a tumble over the weekend, with the price dropping below $70 for the first time since September.

At the time of writing, WTI futures were down -2.38% on the day and trading around the $68.36 level. Daily lows, as of Tuesday 30th November, hit $67.05.

Brent futures are showing similar performance. Down -2.66% on the day, the North Sea benchmark was trading for approximately $71.32. Brent’s daily lows reached $70.23.

A broad sell off occurred last Friday when traders felt the fear after Omicron was first detected. Some traders may see value in lower oil prices, but current thinking implies lower oil demand could be in place.

We’ve already seen Delta-driven lockdowns in key European economies. This new virulent strain may force other nations around Europe and the wider world to restrict travel once more. That signals lower oil demand, thus lower oil prices going forward.

OPEC+ queries production hikes

Reports from OPEC+ suggest the cartel is split between continuing its 400,000 bpd monthly crude production hikes or pausing and rethinking. The $70 oil price is no good for OPEC it seems.

Word on the street is that Saudi Arabia and Russia, OPEC’s largest oil producers, would like a production pause. Others, mainly led by the UAE, are happy to keep pushing ahead with the planned production increases.

The cartel will have to perform another fine balancing act when it convenes for its December OPEC-JMMC meetings this week.

On the one hand, all of these nations require black gold to keep flowing in order to sustain their economies. On the other, keeping pumping out more crude will lead to an oil glut, which will force prices downwards anyway.

The downward price slide began last week, so OPEC has had some time to consider and calibrate its next moves carefully. However, the Omicron variant will put more pressure on the cluster of oil producers to reach a consensus.

Remember earlier in the year when the UAE caused an OPEC+ standstill? There’s historic precedent at play here, which suggests OPEC members may be at loggerheads. It will take some careful diplomacy to resolve what is looking like an oil emergency for the group in its final 2021 meeting.

There are also other, Biden-shaped reasons for OPEC+ to pull back too…

Biden dips into the US strategic oil reserve

Gasoline prices are hovering around a seven-year high, reaching $3.40 per gallon in recent days compared with $2.11 at this time last year.

High oil prices have led to high prices at the pump in the US. It’s a similar story in pretty much every developed economy, but it appears US voters are the most vocal regarding high petrol costs.

To combat this, Biden has authorised the release of stocks from the US Strategic Petroleum Reserve. Some 50 million barrels will be released from stockpiles upon the Presidents orders.

32 million barrels will be exchanged over the next several months, while 18 million barrels will be an acceleration of a previously authorised sale.

This was a coordinated move with several other economies, notably the UK, South Korea, India, Japan, and China all dipping into their own oil reserves too. With additions from these countries, a further 66 million barrels may be available to markets.

The addition of so much oil to the markets may present another reason why OPEC+ could slow its production output.

If that wasn’t enough, US energy envoy Amos Hochstein has indicated more oil could be released if necessary.

“Remember, this was not a 50-million-barrel release, 30 million barrels were an exchange where companies and traders can take the oil now and return it over a scheduled period of time. That means the Strategic Petroleum Reserve will be replenished,” Hochstein told CNBC.

“And therefore, we have more flexibility to be able to do this again in the future if the need arises. I think we wanted to do something that was impactful for the market and that also had the ability and the flexibility to allow us to do that again should the need arise for the American economy.”

From a gasoline price perspective, prices could fall below $3.00 if oil losses are extended. Good news for gas-guzzling working class Americans.

A quick look at the previous EIA storage report reveals US commercial crude inventories rose by one million barrels for the week ending November 19th.

At 434.0 million barrels, US crude oil inventories are about 7% below the five year average for this time of year. Total motor gasoline inventories decreased by 0.6 million barrels last week and are about 6% below the five-year average for this time of year.

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