Just a week ago, oil markets were looking to cross this year’s finish line on a winning note as oil prices recorded a respectable rally thanks to the easing of widespread foreclosure fears. Several reports have shown that, despite faster spread, the Omicron variant causes milder symptoms than Delta and even leads to lower hospitalization rates.
Unfortunately, that optimism was shortlived, and traders reverted to their knee-jerk reaction to any evasion of newer variants of Covid-19 of selling first and asking questions later.
A lack of sufficient data on Omicron, coupled with other bearish factors, has kept traders on the lookout. For example, two days ago, the WHO acknowledged that Omicron caused less severe symptoms, but also said it was not yet clear whether its higher transmission rate was due to it being was less prone to immune responses, higher transmissibility, or a combination of the two.
âEnergy traders don’t want to bet against OPEC +, but all the short-term risks from Omicron tightening to Fed tightening are proving to be very disruptive to the near-term outlook for oil prices. The virus spread across Europe is hitting more than expected and when you calculate family reunions for the holidays, the short term outlook could be reduced over the next month,“Edward Moya, Oanda Senior Analyst told Reuters.
While many experts still view them as short-term concerns, others expect the 2022 outlook to be significantly affected. Concretely, the International Energy Agency (IEA) has summed up the outlook for Q4 2021 and Q1 2022 in one word: surplus.
The IEA became the first market expert to issue demand downgrades based on the Omicron variant.
Surplus to come
The International Energy Agency has published its December Oil Market Report (OMR) on December 14 and includes a first round of demand downgrades due to the release of the Omicron variant.
The IEA forecast world oil demand in the fourth quarter to stand at 98.6 million barrels per day (mb / d), downward from 300,000 barrels per day (mb / d), while that the first quarter forecast of 97.9 mb / d is a downward revision of 630 mb / d.
According to Standard Chartered, OPEC’s current production is already well above OPEC’s call throughout H1-2022. The IEA estimates that OPEC production was 27.76 mb / d in November; given the increases already agreed for December and January, this implies a January average of over 28.2 mb / d, and a first quarter average of over 28.4 mb / d if OPEC + continued its increases in February and March.
Related: Alberta’s Non-Mining Oil Production Hits Record High
The IEA estimate of the call to OPEC is 27.0 mb / d for the first quarter and 27.3 mb / d for the second quarter, which implies a significant build-up of stocks. If OPEC + continues to increase, the IEA forecasts point to a stock build-up of 1.7 MMb / d in the first quarter; if this is not the case, the constitution of the stock would be 1.5 mb / d. If OPEC + continued to increase throughout H1-2022, the IEA forecasts would imply a total stock build-up of around 330 Mb. Given that the IEA hints that there could be a further drop in demand due to Omicron and weaker economic performance, the implication seems to be that OPEC + is unlikely to continue. its increases. Our own balances carry the same implication (see Omicron weakens Q1 outlook – OPEC + is likely to respond). As OPEC + ministers took us on the wrong foot at their December meeting by continuing the increases despite a rapidly weakening fundamental outlook, we expect the next OPEC + meeting (January 4) results in either a pause (60% probability) or a rollback of the agreed increase. December 2 (40% probability).
OPEC’s point of view
The OPEC Secretariat has published its latest monthly oil market report (MOMR) December 13. The outlook for MOMR has been very consistent in its outlook for demand growth in 2022; the forecast was 4.15 mb / d in each of the last four reports. The latest report redistributed this growth differently by quarter and also included some basic changes. The retrospective demand estimate for the first quarter of 2021 has been increased by 950 Mb / d, and this revised baseline provided the bulk of the 1.115 Mb / d upward revision to the first quarter demand. of 2022. China’s oil demand has been revised upwards by 500 mb / d in the first quarter of 2021 and the second quarter of 2022. The baseline changes have helped increase the OPEC Secretariat estimate. the call to OPEC in the first quarter from 1.073 mb / d to 27.9 mb / d.
The comparison of the variation q / q of the estimated call on OPEC crude through the main forecasts shows a q / q decrease in the amount of 0.7 mb / d according to the Energy Information Administration (EIA ); 1.2 Mb / d according to the IEA, 1.3 Mb / d according to the OPEC Secretariat while Stanchart puts the drop q / q at 1.1 Mb / d.
Stanchart notes that while the call for OPEC is decreasing, OPEC + is increasing its production. At some point, this combination will lead to excess demand giving way to excess surplus. Analysts say this surplus is expected to appear as early as this month and accelerate in the first months of 2022.
However, bulls in oil prices can be reassured by the fact that the key US market continues to record significant crude drawdowns, with the latest American Petroleum Institute (API) report estimating the drawdown from crude oil inventories at. 815,000 barrels.
U.S. crude inventories have so far lost some 61 million barrels since the start of the year and have continued to defy expectations for crude builds that tend to occur at this time of year.
Analysts expect another significant draw from 2.60 million barrels for the current week.
By Alex Kimani for Oil Octobers
More reads on Oil Octobers: