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The Biggest Threats To Oil Have Already Been Priced In

  • Oil prices are back above $70 as Omicron fears fade.
  • Rising inflation and faltering air travel demand still pose a risk to market stability.

Oil prices have continued on to recover from last month’s steep dive amid easing concerns over the Omicron variant.

Both major benchmarks are on course for their biggest weekly gains in over three months, with market sentiment less gloomy about the effect of Covid-19 on global growth and fuel demand.

The latest reports from medical authorities and countries facing the variant suggest it is largely mild and can be mitigated with booster shots of the vaccine.

Prices fell sharply in late November when the new variant first emerged – with both Brent and WTI crude plummeting over 10 percent, declining further into the mid-sixties doldrums at the start of the month.

This was a sharp contrast to the three-year highs of $86 per barrel only a month before, but the commodity has since regained about half its losses.

Brent is now trading at $75.14 per barrel – up 0.72 percent on the day – while WTI is selling at $71.68, a near-identical increase of 0.74 percent.

Nevertheless, headwinds remain which will keep a lid on prices and could even cause further shocks to the market.

Macro factors such as rising US inflation and flatlining air travel demand in China due to travel restrictions and weaker consumer confidence have already been priced in.

Newer developments could also cause issues for both benchmark, such as the UK introducing ‘Plan B’ restrictions this week including advice to work from home.

Related: The Multi-Billion Dollar Start Of A Nuclear Fusion Boom

It is not the only European economy entertaining restrictions, with Czech Republic, Italy and Austria having previously introduced new measures in the past month.

If this is replicated across the continent – this could affect demand even with encouraging reports on the variant.

In more encouraging news for oil investors, US President Joe Biden is not considering a ban on exports to head off rising gas prices, while the timeline for his announced plans to flood the market with strategic reserves also has not been finalised.

By City AM

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  • Mamdouh Salameh on December 11 2021 said:
    The risk from the Omicron variant has been excessively exaggerated despite the fact that not a single death has been caused by it and that available vaccines can provide immunity against it.

    Still, both the global economy and the global oil demand are robust enough to take lingering worries about the Omicron variant in their stride. Oil prices are on course to recover all or at least most of their recent losses.

    Rising US inflation normally leads to rising value of the dollar as a result of the tightening measures that the US Federal Bank will take. This affects the demand for oil since other currencies become weaker against the dollar. On the other hand, the very same measures the Federal bank takes slows the growth of the US economy and reduces the value of the dollar. In a nutshell, one cancels the other leading to a very mild impact on oil prices and oil demand.

    In view of the mild nature of Omicron, global travel will soon resume its activities as before.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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