Omicron fears weigh on crude oil

Previously bullish oil markets are now reacting with fear to the Omicron variant. Its spread could be bad news for crude prices going forward.

Crude Oil trading

Oil prices buckle under Omicron

It’s been another tricky week for crude oil.

Both WTI and Brent benchmarks underperformed, starting the week on the back foot, making small gains across Monday into Tuesday.

As of Tuesday 21^st December, West Texas Intermediate futures were trading sideways at around $68.95.

Brent futures were down around 0.5% at the time of writing. They are currently trading for roughly $71.56.

Rising Omicron cases worldwide and a generally uncertainty over lockdown protocols seems to be causing a wobble in a previously confident oil market.

The enhanced volatility may also cause OPEC+ to have a rethink of its output policy in January. The cartel committed to its monthly 400,000 bpd output hike in its December 2021 meeting. But if travel restrictions come into place worldwide, demand for oil could sink again.

OPEC+ said it expects world oil demand to average 99.13 million barrels per day (bpd) in the first quarter of 2022 in its monthly oil market report. That is an increase of 1.11 million bpd from its November forecast.

“Some of the recovery previously expected in the fourth quarter of 2021 has been shifted to the first quarter of 2022, followed by a steadier 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.”

Rising inflation is playing its part too. With a weaker dollar, prices may struggle.

US rig counts continue to rise too. This may also be contributing to weaker prices as the year comes to a close.

According to Baker Hughes, the count rose by four in the week ending December 10^th. 475 oil rigs are now operational across the United States. That said, the States’ crude output is still some one million barrels per day lower than pre-pandemic levels, but it is slowly creeping up.

Either way, the impact of Omicron is yet to be properly felt worldwide. Data from South Africa, where this new COVID strain originated, shows that Omicron is highly infectious, but not necessarily any more deadly than Delta or other strains.

Vaccine booster rollout will take on extra importance for oil worldwide. Let’s hope a third shot can help us all return to normality sooner rather than later.

Tighter inventories give some hope to oil

Helping stop prices falling through the floor were tighter US oil inventories.

The EIA reported a crude inventory draw of 4.6 million barrels for the week ending December 10^th.

At 428.3 million barrels, crude oil inventories remain 7% below the five-year average for this time of the year. Last week’s draw compares with a modest 200,000-barrel decline in crude inventories for the previous week.

US gasoline demand seems to be robust too. This is despite prices at the pump rising over 60% across the year. However, high gasoline demand shouldn’t really be too surprising. US city infrastructure and road networks basically necessitate personal vehicle use, so it appears American consumers don’t really have much of a choice but to swallow high costs.

According to the EIA report, Gasoline inventories fell by 700,000 barrels during the review period. This compares favourably with a 3.9m barrel build-up seen in the week prior. Total gasoline inventories are now about 6% below the five-year average for this time of year.

The latest EIA stockpile data, this time for the week ending December 17^th, are reported on Wednesday 22^nd December.