Oil Prices Under Pressure Despite An Optimistic Outlook

• Oil prices fell on Tuesday morning as European countries tighten covid restrictions ahead of Christmas
• Inflation has added to bearish sentiment in oil markets, with the Federal Reserve expected to announce aggressive measures to counter it this week
• In the long term, however, analysts are optimistic about oil demand, with the impact of Omicron expected to be limited

After a respectable rally last week, oil prices are set to come under pressure as some European countries begin to tighten coronavirus restrictions amid the spread of the latest variant.

Although available data suggests that the Omicron variant causes milder symptoms than Delta, governments and health authorities remain highly concerned about its spread. Naturally, this is not helping build optimism in the oil space, where players still vividly remember the lockdowns from last year. Even though experts seem to be of the opinion that no economy can at this point afford another major lockdown, the worry remains.

"Energy traders don't want to bet against OPEC+ but all the short-term risks from Omicron to Fed tightening is proving to be very disruptive to the short-term outlook for oil prices," Reuters quoted Oanda senior analyst Edward Moya as saying earlier today.

"The virus spread across Europe is delivering a bigger hit than expected and when you calculate family gatherings for the holidays, the short-term outlook could get slashed over the next month," Moya added.

Meanwhile, the Federal Reserve, which is struggling with the highest inflation rate in four decades, is expected to announce an aggressive approach to handling it at its last meeting for the year later this week. The change in tack is believed to be risky for equity markets, which have rallied for most of the pandemic thanks to Fed stimulus, but it appears to be necessary to rein in inflation.

At the same time, it seems that the oil selloff that began among fund managers last month is slowing down. Reuters' John Kemp reported in his weekly column. According to market data, hedge funds sold some 19 million barrels across the six most actively traded oil and fuel contracts in the first full week of December. This compared to a hefty 131 million barrels sold in the previous week.

In fact, according to Kemp, the situation with oil futures right now is such that funds may be about to start buying again. Brent positions, he noted, had halved to some 154 million barrels, and the ratio of bullish to bearish positions had dropped to 2.7:1. This was a favorable moment for more buying, but only if Omicron did not upend markets yet again. Related: Jittery Oil Market Could Trigger Consolidation In The Permian

That's for the short term, but there seems to be a change in sentiment among investors about the long-term prospects for crude oil. A recent Bloomberg survey found that expectations that oil demand had peaked before the pandemic had changed substantially over the past two years.

According to the survey, only 2 percent of the investors polled by Bloomberg Intelligence believe oil demand will peak by 2025. Fewer than 40 percent think it will peak by 2030. A third of respondents in the survey said they believed oil demand would peak between 2025 and 2030, but another third only expected peak demand to occur after 2030.

In themselves, the results may not be particularly interesting. Yet in context, everything changes. The above numbers compare with a fifth of respondents expecting peak oil demand by February 2021 in a survey from 2019. In that same survey, a third believed peak oil demand will occur by 2025. In even earlier surveys, the majority expected peak demand by 2030.

In other words, although the immediate outlook for oil is, as usual, marred in uncertainty heightened by the latest wave of pandemic panic, the longer-term outlook seems at the very least stable. OPEC earlier this week contributed to the sentiment by signaling it expected the Omicron variant to have a mild and short-lived effect on oil markets and maintained its forecast for demand growth.

"The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges. This is in addition to a steady economic outlook in both the advanced and emerging economies," the group said in its latest Monthly Oil Market Report.

By Irina Slav for Oilprice.com

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