Oil prices are at a crossroad today as the OPEC+ meeting is seen by traders as the only likely force to change the bearish environment that the Omicron variant has introduced.
Early news reports suggested OPEC+ members may discuss pausing the alliance’s planned increase for January, or even cut output, but the latest information flow pointed to a ‘stick to the plan’ stance, resulting in some oil price losses.
Very few trading days see the oil market so polarized as today.
While there is a clear bearish monster at the gates, the Omicron variant, bullish traders are placing bets that OPEC+ changes course and lowers crude output, which if realized will add to the support coming from Pfizer’s efficacy confidence in its antiviral pill against the pandemic’s latest strain..
The Omicron variant has sobered up markets during the last few days, halting the oil demand recovery enthusiasm and sending traders scrambling to limit risk in their portfolios.
For prices to maintain high levels and put an end to the descent, traders hope OPEC+ will factor in Omicron in its decision making today and avert its plan to increase output next month, by either keeping production stable or cutting.
It all depends on how OPEC+ sees the demand trajectory evolving. There could be a good reason to reconsider its strategy, as up to nearly 3 million bpd could be cut from the expected global oil demand in the first quarter of 2021 if Omicron hits the world fully-blown and triggers lockdowns.
Even though it seemingly is all about OPEC+ today, the market is also keeping an alert eye on the response from pharmaceutical companies working on anti-viral remedies..
Some price support came after Pfizer CEO communicated his confidence that its antiviral pill that reduces hospitalization and death by 89% is also effective against the Omicron variant.
Statements from the Australian chief medical officer and World Health Organization that Omicron is no deadlier than preceding Covid-19 variants also helped limited the perceived risk for oil markets.
These reassuring statements provided some confidence that stricter travel restrictions and lockdowns are not a definite. Nevertheless, if Omicron brings back strict lockdowns demand will fall and markets know that all too well from recent historical example.
The market wants to believe in OPEC+ to step in and “correct” the more than $12 drop in Brent prices over the past five trading days, but the supply alliance may not be able to single-handedly reverse the full drop, as many demand-side factors will still exist even if OPEC+ gives the market what it wants.
Today will prove to be a battle of the bargain hunters, which include the investment bank true-bull believers that the last five days are a blip in the oil price trajectory, and the market bears who see risk not only in more Covid-19 lockdowns, but the overall macro picture.
Our base case assumption is that with so many data points on Omicron missing, OPEC+ will opt for a cautious approach until the demand impact is better quantifiable.
The path of least resistance for the OPEC+ group is to hit ‘pause’ on its supply tapering plan, and give the market some room to breathe until January 2022.
OPEC+ hitting pause on supply should normally be enough to drive bullish price sentiment, but given the current uncertainty and volatility reverberating the markets, nothing is for granted.
Another option on the OPEC+ table is to stand its ground and send a message to oil-consumers that its supply policy is not subject to volatile newsflow and external pressure to reduce output.
However, a 400,000 bpd crude increase is quite minor against the bearish macro backdrop of rising Covid-19 cases in Europe and the arrival of the first Omicron case in the US, not to mention shaky economic growth and an increasingly fraught confrontation with inflation.
These demand-side forces are already known risks, but unlike supply management, cannot be reversed with the flick of a pen by OPEC+ ministers.
If OPEC+ stays the course and brings 400,000 bpd back online, the price reaction will be negative, perhaps by several dollars per barrel in today’s trading.
Only a bold move of removing sizeable supply for January 2022 would likely create a sustainable bullish price momentum.
The group did opt for such a cut in January 2021 after Brent slumped to the low $60s in December 2020, but the action wasn’t announced until the last moment, and we could expect a similar secretive approach for today’s meeting.
