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In early December, the oil market faced an unprecedented drop. For the first time since March 2020, global prices collapsed by almost 20 percent. The fall was influenced by the emergence of the COVID-19 variant omicron and the US decision to bring 50 million barrels from its strategic petroleum reserve to the market. Several other countries followed suit.
Combined with the risks of new lockdowns, these developments caused a serious fall in oil prices. Traders fear new lockdowns and travel restrictions, with a resulting decrease in oil demand. Indeed, various quarantine measures are being introduced around the world. For example, Japan canceled key figure skating events leading up to the Winter Olympics; flights to and from African countries and some other regions are being curtailed; and, in Europe, governments are beginning to introduce restrictions and, in some cases, mandatory vaccinations.
However, OPEC+ managed to stabilize the oil market after what had been an incredibly volatile week, with the group adding plenty of caveats to its decision to stick to a planned 400,000 barrels per day output increase for January.
Nevertheless the market was counting on a more conservative decision amid concerns about the omicron variant’s impact on demand and the additional supply being brought on to the market by releases of strategic reserves.
In reaction to this news, prices fell below $66 a barrel, but then quickly recovered as details about the caveats calmed the market’s fears of OPEC+ ignoring omicron risks. In addition, the market realized that it was not about an additional increase, but about adherence to previously reached agreements.
Indeed, OPEC+ has recently been trying to avoid sudden movements and to comply with previously reached agreements as much as possible. So far, this strategy is bearing fruit as it counters excessive market volatility. On the other hand, the alliance at each meeting emphasizes that it reserves the right to react quickly and adapt its policy if market conditions shift.
At the December forum, it was decided to closely monitor the situation with the new variant, to keep the meeting technically in session, and to “leave the door open” until the next scheduled meeting on Jan. 4, 2022. Still, the decision by OPEC+ to increase production risks leaving the oil market in oversupply, even if panic over the new variant does not play out and consumption continues its steady rise.
As a result, crude prices ended the week on decline. NYMEX January WTI settled $1.9 lower at $66.26 a barrel and ICE February Brent finished $1.7 lower at $69.88 a barrel.
But the oil market was reassured during the past week by the news that the omicron variant might not be a strong demand disruption factor previously feared. Key vaccine manufacturers Pfizer and BioNTech said that initial laboratory tests show that a third dose of their vaccine increases protection against the new variant. This helped to ease tension, although some countries are introducing targeted measures.
Indeed, over the past few days, oil prices have recovered, and the Brent benchmark again exceeded the mark of $75 a barrel — up 7.5 percent on the week and WTI settled at $71.67 per barrel — up 8.1 percent on the week. As knowledge about the new variant expands, initial concerns are eased, providing upward support to overall market sentiment.
So, the likelihood of another period of mobility constraints and a temporary decline in oil demand is decreasing. While these short-term sentiment swings obviously largely explain the ups and downs of recent days, fundamental factors do not seem to have provided significant support to prices for a long time.
In general, the current market sentiment swings and the oil market is in a transitional phase, with production growth exceeding demand growth, as the post-pandemic recovery of the global economy has largely ended.
The latest official data from the US, Europe and China point to stagnating demand, as their economies have largely returned to pre-pandemic levels, at least the parts in which the use of oil plays an important role. Meanwhile, supply continues to grow gradually, given the increase in shale oil production, the release of strategic reserves and the continued easing of restrictions on oil production by OPEC+ countries.
Yet, there is still plenty of uncertainty in the near term with regards to price direction and, as a result, the market is likely to remain under pressure and volatile. Even before the news about the new variant, the market was dominated by the consensus that in 2022 it would go into surplus and prices would gradually decline. The question is, at what pace this will happen?
But market sentiment and underinvestment in the sector could provide upward support to prices in the short term. With positive news, oil prices may still form a short-term jump to the $80 a barrel region, but one cannot count on the stability of such levels.
Meanwhile, volatility is uncomfortable for both producers and consumers. These are the realities in which it is necessary not only to consider standard indicators, but also to wait for the final assessment of the seriousness of the new COVID-19 variant.
• Dr. Namat Abu Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.