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13.12.2021 04:38 PM
Oil slides after last week's rally. Experts revise demand forecasts for Q1 2022

Oil futures slided in New York after their biggest weekly jump in three months as traders weighed the risks from the omicron variant, and physical markets showed further signs of softening.

Oil slides after last week's rally. Experts revise demand forecasts for Q1 2022

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West Texas Intermediate futures fell by 0.7% to settle near $71 a barrel in the early New York trading session. On the ICE Futures Europe exchange, Brent for February settlement slipped by 0.8% to $74.56, thus trimming earlier gains.

"The major oil contracts registered decent weekly gains, but it is noticeable that current prices are still way below the pre-Omicron levels," oil analyst Tamas Varga said.

Energy consumers are no longer confident that fuel consumption will withstand the new virus strain, which propelled crude 8.2% higher last week, especially after the news that at least one patient with Omicron has died.

On Monday, OPEC raised its world oil demand forecast for the first quarter of 2022 but left its full-year growth prediction steady, saying the Omicron coronavirus variant would have a mild impact as the world gets used to dealing with the pandemic.

Interestingly, three days ago, the market barely reacted to an announcement last Friday by the US Department of Energy that it would sell 18 million barrels of crude oil from its strategic petroleum reserve (SPR) on December 17, as part of a previous plan to try to reduce gasoline prices. Apparently, traders have already priced this factor in.

"The oil market risks facing a sizable oversupply in the first quarter of 2022... We therefore envisage potential setbacks for the oil price in the coming weeks," Commerzbank analyst Carsten Fritsch noted.

Regional markets

UK Prime Minister Boris Johnson has said the country faces an emergency from Omicron. Moreover, he does not rule out further restrictions to contain it, Johnson added. At the same time, Britain increased its investment in renewable energy sources, which also affected the local futures market.

In addition, there have been some indications that high prices have sapped consumption in Asia. Thus, Asian buyers did not ask Saudi Arabia for additional cargoes last week after the kingdom hiked prices this month. Data shows that dated to front-line swaps, used to hedge crude cargoes in the North Sea, are currently trading at discounts of about 50 cents a barrel. They were at premiums before Omicron really hit markets.

The Chinese government has also pledged to lift tough restrictions on electricity consumption in order to reduce public tensions. China has also solved coal supply problems, but the structure in the North Sea market is coming under pressure.

Global prices have received some support from forecasts that Beijing will start adding fiscal stimulus in early 2022 after the country's top officials said their key goals for next year include stabilizing the economy. This should further improve sentiment in the market, given the Asian nation is the world's biggest oil importer.

Epidemiological situation

"Risk-reward is not attractive, with the omicron spread in the initial phase," Helge Andre Martinsen, senior oil analyst at DNB Bank ASA in Oslo, said.

This month, oil has shown a partial reversal - after tumbling into a bear market in late November - on signs that nervousness around Omicron might have been overdone. Iraq's oil minister said on Sunday that he doesn't see any impact from the latest outbreak yet.

Still, traders are unsure how much scope there is for a further recovery with so much uncertainty in the outlook.

"The omicron fears are certainly continuing to shift away from the worst-case scenario," Vandana Hari, founder of Vanda Insights in Singapore, said. "The higher transmissibility is not in doubt, but the worst-case fears of a spike in hospitalizations and deaths are certainly receding. Crude still has some more ground to reclaim," she added.

The Brent crude structure itself is weakening, with the spread between the second and third monthly futures contracts at about 31 cents a barrel, down from 63 cents on November 24.

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