Omicron Doom and Gloom may not be justified


They say once bitten, twice shy. Last year, global oil traders were in shock after oil prices fell into negative territory for the first time in history, a scenario few people could have imagined, let alone predicted. And their knee-jerk reaction to any emergence of new Covid-19 variants now appears to be: sell first, ask questions later. They did it with Delta, and now they’re doing it with Omicron.

After six months of impressive gains, oil prices have suddenly reversed as a new wave of Covid-19 threatens to end the Bull Festival prematurely. WTI and Brent crude continued their fall on Thursday, collapsing below $ 70 for the first time since September, as the weeks-old Omicron coronavirus strain sparks fears about the potential effects on travel and oil demand as well as the global economic recovery. On November 26, Brent prices fell more than 10% in a single day for just the 15th time since the start of Brent futures trading in 1988, marking the fifth daily decline in USD and the seventh in percentage terms.

But it is not the oil markets alone that have been hit hard; global stock markets, as well as the majority of commodities, are also selling.

Base metal prices posted a massive selloff spurred by the announcement of the Omicron COVID variant that scared off risky assets, raising concerns about potential lockdowns, mobility restrictions and the impact on the economic recovery. The price declines were led by aluminum and nickel, followed by copper, tin and zinc; lead recorded the smallest decline. LME inventories continue to decline for all base metals and the cash flow and three-month spread for the entire complex remains out of step, reflecting an approaching tightening.

During this time, Platinum group metals remain even more vulnerable after Omicron hit PGM markets in a quarter of oversupply, putting them at downside risk.

But all this misfortune may not be fully justified.

Irrational fears

Indeed, in its latest commodities report, Standard Chartered analysts warned that while the underlying trends for most commodities, including oil, remain favorable, Omicron has triggered irrational fears that may temper the hopes of a commodity supercycle.

On Monday, the World Health Organization (WHO) declared the Omicron coronavirus variant was at very high risk of outbreaks of infection, with border closures by more countries now casting a shadow over an economic recovery from the two-year pandemic.

But markets seem more frightened by comments from Modern Managing Director Stéphane Bancel who warned that existing vaccines will be much less effective at fighting Omicron than previous strains of coronavirus, adding that it would be months before pharmaceutical companies can make Omicron-specific vaccines on a large scale.

“There are no people, I think, where [the effectiveness] is of the same level. . . we had with [the] Delta [variant]. I think it’s going to be a big drop. I don’t know how much because we have to wait for the data. But all the scientists I spoke to. . . are like: “It’s not going to be good” “, Bancel told the Financial Times.

Bancel says scientists are particularly worried because 32 of the 50 mutations in the Omicron variant are on the spike protein, which current vaccines focus on to boost the human body’s immune system to fight Covid. Most experts didn’t expect such a highly mutated variant to emerge in less than a year or two.

However, not everyone agrees with Bancel.

The Moderna chief’s comments came at a time when many public health experts and politicians have tried to set a more optimistic tone about the ability of existing vaccines to protect against Omicron.

Monday, Scott Gottlieb, director of Pfizer and a former US Food and Drug Administration (FDA), told CNBC: “There is a reasonable degree of confidence in the vaccine circles that [with] at least three doses. . . the patient is going to have fairly good protection against this variant. “

Moderna and Pfizer have become the main suppliers of vaccines for most of the developed world.

More encouragingly, it is the start of the Omicron era, but so far most cases have been relatively mild. In fact, the WHO underlined this observation and urged countries to apply “an evidence-based and risk-based approach ” travel measures instead of resorting to blanket bans.

To be fair, the oil selloff began in October before Omicron became a major concern and accelerated in November soon after. OPEC downgraded its forecast for 2021 global oil demand of 160,000 bpd, citing weaker economic factors in China and India.

But on the same report, OPEC issued an optimistic note, saying everything indicated the market would remain tight for the rest of the year.

Talks about selling US oil from its strategic reserves haven’t helped matters either. Last week, the Biden administration announced that it release 50 million barrels of crude oil strategic oil reserves with the aim of lowering gasoline prices.

Yet the market overestimates this one-off event. According to Goldman Sachs:

Our pricing model shows that the price drop of $ 8 / bl since late October equates to market pricing in a combined impact of 4 million b / d on demand or increased supply over the three next months. This would be … the equivalent of a government outflow of 100 mn bl as well as an impact of 1.75 mn b / d on demand due to the current resurgence of Covid,“Goldman Sachs analysts wrote in a note cited by Argus.

Goldman maintained its forecast of $ 85 for average Brent prices for the current quarter, stressing that the oil market remains in deficit.

Stanchart is more pragmatic and says that the failure of an oil price rebound so far perhaps implies that a business vision of hope for the best on Omicron is unlikely to be sustainable, at least until that firmer information on transmissibility, vaccine efficacy, and likely government responses is available. Additionally, analysts say Omicron fears are likely to be a deciding factor in reversing sentiment against ultra-bullish views of $ 100 / bbl.

The latest weekly data from the Energy Information Administration (EIA) was slightly bullish according to our bullish US oil data index, which fell 33.1 w / w to +19.8. The strength of the data was on the petroleum side, with the crude oil element neutral or slightly bearish, and appears to support Stanchart’s conservative stance at this point.

By Alex Kimani for Oil Octobers

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