OPEC and its allies are on high alert this week when they meet to decide whether to stick with their planned oil output increase or hold off until more is known about the Omicron variant of the coronavirus.
The Organization of the Petroleum Exporting Countries will meet with its allies led by Russia, a grouping known as OPEC+, on Thursday. They’ll discuss how to assess the potential impact of the Omicron variant on crude demand, as well as moves by the United States and other countries to tap their strategic oil reserves to cool blistering prices. The current plan is to add to global markets 400,000 barrels of crude per day.
“OPEC+ is dealing with some bearish unknowns as they try to process what’s going on with the Omicron variant,” said Louise Dickson, senior analyst at Rystad Energy.
Oil prices had the largest daily drop – $10 a barrel – since March 2020 on Friday as news of the Omicron variant hit the headlines, kindling fears of fresh business-sapping coronavirus restrictions. Several countries have already enacted a new wave of travel restrictions. Concerns are also rife over how effective current COVID-19 vaccines may be against the new variant.
By Wednesday, oil clawed back some of those losses as the market looked to the OPEC meeting. Global benchmark Brent crude settled down 0.75 percent at $68.71 a barrel while US West Texas Intermediate (WTI) crude futures were trading 1.21 percent lower at $65.38. But they are still off October highs, when a global energy crunch saw Brent reach $86.70 a barrel and WTI $84.65 a barrel.
Oil & Omicron
Oil, stock and even cryptocurrency markets were rattled after the World Health Organization on Friday declared Omicron a “variant of concern”. The news spawned concerns that business-sapping restrictions to contain the virus’s spread could be introduced again, and slow the global economic recovery.
For oil exporters, that means the insatiable appetite of late for crude could be curtailed.
“OPEC+ has been relatively conservative on oil demand, saying demand is still fragile and weak,” said Dickson. “I think the market sentiment right now is that if this is another Delta-type variant, there could be an extreme dent in oil demand consumption.”
Rystad Energy’s base-case scenario is that the group will hold their 400,000 barrels per day increase or slightly cut it.
Global health authorities are racing to try and gain a better understanding of Omicron, while makers of COVID-19 vaccines have started trials to gauge how effective their current jabs are against the new variant.
Against that backdrop of uncertainty, OPEC+ is still expected to make a policy decision by Thursday.
“We understand that Omicron is mainly a jet fuel story but it will be about two weeks until we know how effective the vaccine is in fighting it,” said Reed Blakemore, deputy director at the Atlantic Council.
Strategic Petroleum Reserve
The headline from OPEC+’s last meeting was its snub of US President Joe Biden’s ask to pump more oil to cool red-hot petrol prices. Since then, the US in tandem with other countries tapped its own Strategic Petroleum Reserve, a national stockpile of crude ready to be accessed in case of emergencies including shortages and price hikes.
US Department of Energy Deputy Secretary David Turk said on Wednesday that Biden would reconsider or delay tapping more reserves if prices cooled. Crude inventories in the US hubs have grown recently.
Analysts now say that the slightly assertive rhetoric between oil importing and exporting countries that existed two to three weeks ago has subsided, and that the recent increase in oil prices was the result of growing demand as the world comes out of COVID-19, as well as a whole lot of market optimism about the future.
But the release of oil from strategic reserves has tamped down prices at least in the short term, Blakemore noted. And now Omicron has served as a sobering reminder of how unpredictable the pandemic can be.
“Omicron darkened the mood of market sentiment that has been optimistic on demand,” said Blakemore.
Dickson agrees. “Our position three to four weeks ago was that Biden should wait [to tap the strategic reserves] because the market forces were getting bearish on their own. We thought that the market would straighten itself out, which it more than did.”