Oil prices are rising today, continuing their positive vaccine news euphoria, as the market downplays – for now – the Omicron threat and bushes off the otherwise bearish outcome of the OPEC+ meeting.
Here is Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:
The bullish signals are also being sent on the sell-side, as Saudi Aramco reportedly poised to raise its official selling price of crude to Asia, suggesting an increase in demand for physical barrels.
Despite facing weak margins, an increase in refinery runs in China would in particular support the sour crude market in the medium-term, adding particular incentive for OPEC+ to stick to their production target of raising 400,000 bpd in January 2022.
However, once the Omicron variant is discovered in China, its zero tolerance Covid-19 policy could put a rapid halt to oil products demand, potentially sending oil much closer to $60 per barrel Brent than $70 Brent.
Yesterday’s OPEC+ decision to boost production was initially received as bearish and Brent traded down towards $66 per barrel Brent but after the group’s decision, the overall positive vaccine news pulled the market higher, a positive sentiment that continues today.
The relatively quick decision by OPEC+ to go ahead with a planned supply increase with modifications is not what the market was pricing in, but this is explained by the Covid-19 newsflow that outweighed the OPEC+ decision.
Vaccine news helped pull prices back up but if the market changes its mind and anticipates a worse Omicron impact, which comes on top of the severe increase in cases in Europe, price sentiment will sour again.
Despite sticking to its plan, OPEC+ left a window open to protect against the Omicron downside, with an open line between the producers of the alliance to change the decision during December should the market situation worsen.
The decision by OPEC+ to increase production by the planned amount but to leave an open window to reconsider course is a bearish developments if viewed on its own.
If positivity about vaccine and antiviral pill efficacy was absent, prices would have reacted differently yesterday and wouldn’t have recovered after the initial post-OPEC+ meeting dip.
The relatively quick decision to go ahead with a planned supply increase with modifications is not what the market was pricing in, with OPEC+ pointing to the still unknown impacts and severity of Omicron, pending more detailed guidance from vaccine manufacturers and the World Health Organization.
Given the great demand unknowns, it was a masterstroke by OPEC+ to keep its meeting technically in session and to “leave the door open” until the next scheduled meeting on 4 January 2022, which is also helping oil prices gain today.
The hedge from OPEC+ is being met with bargain-hunting in spot price buying – the positive news from pharmaceutical companies outweighs the news of the supply addition.
However, the decision by OPEC+ to increase production in January 2022 risks leaving the oil market in oversupply, even if the Omicron panic doesn’t play out and oil consumption continues its steady ascent.
As it is too soon to draw any sturdy conclusions on the Omicron threat, it seems the market leans towards the positive side of the scale. What is more certain is that volatility will likely remain elevated.
With the discord between oil producers and suppliers remaining unresolved, a bullish Wall Street on antivirals and lockdown-wary governments making tough decisions on mobility restrictions ahead of Christmas, there are still several supply and demand-side developments before the close of this year that warrant close attention by the market.
Looking at balances, the alliance’s move to increase supply to 38.4 million bpd in December 2021 and then to 38.8 million bpd by January 2022 will leave the market in a condition of oversupply, of at least the tune of 700,000 bpd in total liquids implied stock builds.
And, if we factor in a severe lockdown scenario due to Omicron, then the January balances would look tremendously worse.
OPEC+ bought itself some time, mirroring its decision at the December 2020 meeting to stay the course after Brent slumped into the low $60s.
Instead of jumping in to save the market which was then in disarray over Christmas lockdowns, OPEC+ instead waited for the new year to make any material changes to its supply tapering program. And when it came back, it came back with a punch – a 1 million bpd extra Saudi cut.
What will OPEC+ do in January 2022? They have a variety of tools at their disposal, from overall lowering country-by-country target levels to better match realistic output expectations, to lowering their eventual end target production figure of 42 million bpd for September 2022.
At yesterday’s meeting, both Saudi Arabia and Russia were aligned in downplaying the demand risk from Omicron.
But there are some actors taking the Omicron variant very seriously such as Europe, which - since the new variant news broke on 26 November 2021 - has been making hasty steps towards restrictions, and now in some cases, lockdowns.
Wall Street is betting big on the Merck and Pfizer anti-viral pills, mirroring the bullish moves that came with the announcement of the vaccines from Moderna and Pfizer in November 2020. Just how far down the road such a medical breakthrough is, and the availability in countries with low vaccination rates, are still unlikely Christmas gifts.
