Oil prices are falling today as concerns over the Omicron Covid-19 variant and the effectiveness of existing vaccines against the strain trigger bearish sentiments on global demand.
Here is Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:
When the first Covid-19 vaccines were announced to the public, the shots pushed oil prices up, doubling in less than a year, which shows the gravity of significant vaccine news for energy markets.
Any news related to the effectiveness of vaccines is material for the oil market. When inoculation hiccups come along, they will be priced in as they alter the oil demand trajectory, which is exactly what happened today.
In the face of the Omicron variant, global oil markets fell this morning in response to Moderna openly communicating that they don’t have the magical elixir to dispatch immediately and also stating that there will be a “material drop” in the efficacy of the Covid-19 vaccines.
After Moderna’s bearish announcement, traders will also wait for hints from other vaccine makers, and if more voices reinforce Moderna’s efficacy concerns, further price downside can be expected.
The threat to oil demand is genuine. Another wave of lockdowns could result in up to 3 million bpd of oil demand lost in the first quarter of 2022 as governments prioritize health safety over reopening plans, of which there is already telltale evidence, from Australia delaying its reopening to Japan banning foreign visitors.
Omicron isn’t the only downside lever pushing the pulse on oil prices.
The prominent market signal this week will come from the OPEC+ meeting, and the market will be watching for how OPEC+ decides to respond to the bearish duet of the threat of the Omicron variant and last week’s coordinated release of SPRs from major oil-consuming countries.
The group does not typically make knee-jerk policy decisions and prefers to stay behind the demand curve. If they follow that strategy, one of two options seems likely; they will continue their conservative approach of increasing output by 400,000 bpd every month or take an even more cautious angle and hold back more supply until the outlook triggered by Omicron is clearer.
In other oil price-moving news, nuclear negotiations with Iran reopened on Monday, November 29, delivering more negative vibes to crude trading desk.
If a revival of the Iran nuclear deal is agreed, sanctions could be lifted by the end of the year, triggering a jump in Iranian crude oil production from the current 2.5 million bpd level to 3.5 million bpd by the end of 2022.
The price correction due to loosening supply that was expected for the first quarter of 2022 arrived early with Omicron.
The oil market supply-demand balance is expected to pivot from draws to builds already at the beginning of 2022 as US oil production remains robust, the gradual return of OPEC+ barrels, and minor growth outside OPEC+.
