As we have been highlighting over the last several weeks, there are a number of factors putting downward pressure on oil prices, including increasing supply, strengthening US dollar, declining sentiment of oil traders and the ongoing COVID-19 saga. At the end of last week, the advent of a new variant of COVID-19 had a major impact on oil prices. The price of Brent crude ended the week at $71.60 after closing the previous week at $78.66. The price of WTI ended the week at $68.17 after closing the previous week at $76.11. Also, as we have been forecasting, the Brent-WTI differential widened to $3.43 from the previous week of $2.55 and $1.26 for prior week.
With the decline, oil prices have dropped below the support level for the first time since August 20 of this year. During that occurrence, oil prices rebounded quickly and then started moving back on an upward trend. For the upcoming week, we are expecting that oil prices will recover a portion of last week’s decline, but the subsequent price recovery will be muted.
As noted above, the appearance of a new variant – Omicron – is causing increased concerns about COVID-19 and the impact on economic activity and oil demand. The Omicron variant first appeared in South Africa, but other countries have already reported cases involving the variant – including Canada, Australia, the Netherlands, and Austria. At this time, there are concerns that the variant is more transmissible and increases the probability of contracting COVID-19 for a second time. Countries are reacting by reinstituting travel bans, mask mandates, and increased testing.
The new variant is appearing in the midst of cases increasing for several weeks – and at an accelerating pace. Over the last 14 days, cases increased by 14%, but deaths decreased by 3%. The focus of the increases is in Europe, and to a lesser extent North America, while cases are still trending downward in other regions.
- Cases in Germany increased by 58% and deaths increased by 59%
- Cases in the UK increased by 20%, while deaths decreased by 21%
- Cases in France increased by 165% and deaths increased by 79%
- Cases in Italy increased by 57% and deaths increased by 33%
COVID-19 continues to increase in the US with cases increasing in the upper Midwest and the Northeast. Overall, cases increased by 6%, hospitalizations by 12%, while deaths decreased by 13%. However, the data are understated because many states did not report over the holiday weekend.
In the US and Europe, the number of deaths is still relatively low when compared to the spike in cases that occurred during the previous year. Further cause for optimism is offered by the roll-out of the vaccine boosters. However, the appearance of Omicron could change the dynamic, including the long-term management of COVID-19. The extent of the disruption will be determined by the severity of the symptoms, rate of transmissibility and the effectiveness of vaccines against the new variant. The answers to these questions are still unknown.
Another noteworthy development was that the Biden Administration announced a release from the SPR. This is on top of barrels that are already being released on a weekly basis as part of the US federal budget. Currently, crude inventories (excluding strategic reserves) from global or US perspective are not unusually low. Since 2015, the lowest US crude inventories were 394 million barrels, which was reached in September of 2018. At present, US crude inventories are 433 million barrels. Product inventories in the US are also not unusually low with gasoline inventories and diesel inventories essentially at the same level as 2019. Furthermore, we are forecasting that supply and demand will be moving toward alignment if there is no disruption to the current trends. With consideration of the increased supply from OPEC+ and from non-OPEC producers, including the US, we are forecasting that global liquid supply will increase by 1.39 million b/d in 4Q (in comparison with 3Q), but will be some 4.32 million b/d less than in 4Q of 2019. In comparison, oil demand is forecasted to increase by 0.620 million b/d in 4Q, but only will be 1.03 million b/d less than in 4Q of 2019. As such, overall oil demand will continue to outpace supply in 4Q, but to a lesser extent than in 3Q of this year. However, because of the significant build in crude inventory during 1Q and 2Q of 2020, crude inventories will remain greater in 4Q of this year than in 4Q of 2019. Based on our forecast for 2022, we are expecting that supply and demand will reach a balance in 3Q of 2022.
Members of OPEC+ are scheduled to meet on December 2 to discuss future supply increases. Previously, members of OPEC+ have agreed to increase supply by 400,000 b/d on a monthly basis. OPEC+ has been cautious in adding barrels only wanting to add supply to keep the oil market stable and oil prices from spiking. OPEC+ does not want oil prices to move much past $80.00 for any sustained period of time, in part, because of concerns of the impact on the sustainability of the economic recovery and the long-term impact on demand. Additionally, OPEC+ is also still worried about shale producers in the US ramping up production in response to higher prices. However, members of OPEC+ are also worried about getting ahead of the market, in terms of supply, because of concerns about the sustainability of demand growth within the context of rising COVID-19 cases, ongoing supply chain issues and slowing economic growth. The concerns shared by members of OPEC+ will not be alleviated by releases from strategic petroleum inventories – and, if fact, could make them more cautious with respect to adding supply.