The news of another coronavirus variant that prompted some countries to close their borders frightened traders who exited their bullish positions on the commodity in droves a week ago. Now, however, sentiment is reversing.
Crude oil had been falling for six weeks previously due to a combination of factors, including the U.S. announcement that the government is ready to release 50 million barrels from the strategic petroleum reserve to power retail fuel prices.
Worry about Covid-19 flare-ups in Europe also weighed on crude oil, and institutional traders ended up selling the equivalent of 293 million barrels of crude among the six most traded futures contracts in the two months to end-November, according to Reuters’ John Kemp.
In the last week of November, according to the data cited by Kemp, even OPEC+’s decision to not touch its agreement for boosting production was not enough to return optimism on the oil market: hedge funds sold the equivalent of 131 million barrels of oil during that week across the six most popular oil and fuel contracts.
But then initial reports from South Africa that the Omicron variant appeared to cause much milder symptoms than Delta began to get confirmation. The New York Times cited South African researchers this week as saying the patients infected with the new variant did indeed have milder symptoms than people infected with the previous strain. The information was confirmed by Dr. Anthony Fauci in the United States, although some experts have cautioned against premature optimism since it is still early days.
Yet the latest updates on Omicron had a quick effect on oil trader sentiment, helped by other factors that combined to push crude oil prices up by 5 percent at the start of this week. In addition to the hopes this coronavirus variant would only cause mild illness, Saudi Arabia indicated it is bullish on oil demand by raising its official selling price for crude for its biggest markets.
The Kingdom hiked prices for Asia by as much as $0.60 per barrel for January from December, bringing the total premium for its flagship Arab Light to $3.30 above the benchmark Dubai/Oman spread. The move was a strong sign of confidence in oil demand despite worry expressed about that same demand in the latest OPEC monthly oil report.
Other OPEC members also demonstrated confidence about the immediate outlook for oil, with Iraq oil minister Ihsan Abdul-Jabbar saying he expected Brent to recover to more than $75 per barrel. At the time of writing, Brent crude was indeed trading a little above $75 per barrel.
An additional factor that boosted prices was the latest setback in the U.S.-Iran nuclear talks. These resumed earlier this month but broke down almost immediately, with European proxy negotiators “expressing dismay,” according to Reuters, at the demands made by Iran’s new government, which included a complete overhaul of the draft agreement negotiated in previous rounds of the talks.
Brent crude is down roughly 15 percent since late November, with much of that decline sustained on a single day—the Friday after the news broke of the Omicron variant. That day, both Brent and WTI lost more than $10 as panic struck markets. While both benchmarks have rebounded since then, the drop is the latest evidence that excess volatility is likely to continue for the observable future as scientists gather data about the new variant.
Fundamentals remain uncertain on the demand side because of the pandemic, which means OPEC might need to continue signaling confidence to keep prices from falling again. Investment banks, meanwhile, remain overwhelmingly bullish on crude, too, with some of them expecting triple-digit Brent prices next year, citing overlooked underinvestment and a robust demand outlook.
By Irina Slav for Oilprice.com
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