A historic oil plunge as traders and computers set off a selling wave on reports of the spreading Omicron variant of the COVID-19 plague. The variant first identified in South Africa, has been detected in locations from Australia to Germany and Canada, and as many as 12 countries.
The market went Omicron crazy but raised worries of larger underlying problems with the global economy. The reality was in short supply, but fear permeated all markets. Oil tanked 13% but is now recovering as cooler heads are trying to prevail. We could still see some swings after a lot of technical chart damage, yet the odds are that the market priced in a lot more demand destruction that should happen. The market has priced in the equivalent of an overnight drop in demand of over 4 million barrels a day while the reality will be nowhere close to that.
OPEC delayed its technical meeting as they are trying to get a handle on just how bad this will be. We believe that it is more than likely to decide to delay its production increase despite reports that OPEC+ is just watching market conditions. Reuters reports that Russia sees no need for urgent action on the oil market over the new Omicron coronavirus variant, Deputy Prime Minister Alexander Novak was quoted as saying on Monday, downplaying the possibility of changes to an OPEC+ oil supply deal this week. OPEC+ will hold online meetings this week to decide on oil production policy on Thursday.
In the meantime, the market waits to get a handle on whether this new variant will have a lasting impact and be as big of a threat to oil demand that the market seemed to suggest. Based on some early reports it may not be as bad as feared yet there are still a lot of unknowns as scientists wait for more data.
Zerohedge reports that, “Barry Schaub, chairman of the Ministerial Advisory Committee on Vaccines, told Sky News on Sunday that while South Africa, which first identified the new variant, currently has 3,220 people with the coronavirus infection overall and while the variant does appear to be spreading rapidly, there’s been no real uptick in hospitalizations.“The cases that have occurred so far have all been mild cases, mild-to-moderate cases, and that’s a good sign,” said Schaub, adding that it was still early days, and nothing was certain yet.
We know that the cart was out in front of the horse but we must respect the fact that the charts saw some technical damage. And as bad as the selloff was on Friday, the price of oil is still substantially above where it was a year ago. Light volume and the Thanksgiving Day holiday trade that is notorious for sharp selloffs are at play. Yet if you are a hedger this should be an area where you may want to lock in hedges. Unless this variant becomes a major global lockdown, we are looking at the low prices for the year and the first quarter of next year.
Worries about Chinese growth and its property sector added to market worries, yet signs show that Chinese demand is improving. SP Global reports that the average utilization rate at China’s four state-owned refiners rebounded to 82.6% in November, from a five-month low of 80.6% in October, while independent refiners also raised run rates with refining margins remaining good.
The Biden administration wants to do everything it can to lower gas prices except this. Reuters reports that the Biden administration proposed a slew of changes on Friday to the nation’s federal oil and gas leasing program, including hiking fees on drilling companies and limiting their access to sensitive wildlife and cultural zones.
Natural gas gave up gains as the weather changed. EBW Analytics reported that, “The December natural gas contract spiked higher into final settlement last week, up 48.0¢ (9.7%) in the last two trading days before rolling off the board. Fundamentals, however, continued to weaken, with the 1–15-day outlook losing 18 gHDDs and 24 Bcf week-over-week. A reversal of Friday’s settlement-driven technical run-up—and the further loss of 19 gHDDs and 31 Bcf of demand for gas since Friday—are likely to send January natural gas sharply lower early this week. Prices under $5.00/MMBtu, a loss of more than 50¢ (-10%), are possible.