Omicron blurs oil landscape after demand picks up

Oil rose higher for most of 2021. Demand increased as the economy improved, while producers in the Middle East and elsewhere put millions of barrels of crude into the ground each day. Global benchmark Brent-crude prices rose more than 50% to $77.78 a barrel.

The rally gave bumper earnings to companies such as Exxon Mobil Corp and Chevron Corp, making energy the S&P 500’s best-performing sector for the year. Miners including Glencore plc and Freeport-McMoran Inc also enjoyed a share-price run-up driven by advances in commodities ranging from coal to copper.

Drivers are having trouble. According to AAA, average national prices for regular gasoline have risen from $2.25 a gallon a year ago to $3.29 a gallon, though they’re down from about $3.40 before the emergence of the Omicron version of COVID-19. Energy contributed to the fastest pace of consumer-price growth in decades of this decline, prompting President Biden to release crude from strategic reserves.

Crude oil prices hit their highest level since 2014, before the government banned travel to stop Omicron in late November. They’ve looked since then, leaving traders to wrestle with two questions: Will Omicron spill oil on its upside? Or will it seek to restart its progress, perhaps testing the world’s capacity to produce crude?

Francisco Blanche, Head of Commodities and Derivatives Research at Bank of America, said, “We have learned that demand can return with a vengeance. He thinks Brent prices could reach $120 a barrel in 2022, post-Covid-19 Except for a surge in hospitals. Or a major outbreak in China.

The world is still using less oil than it was on the eve of the coronavirus, according to the International Energy Agency, consuming about 96.2 million barrels per day this year. But demand has returned faster than production, and demand will reach pre-coronavirus levels by more than 100 million barrels a day in the third quarter of 2022, Energy Advisory figures.

The long-term path of demand and production of fossil fuels is another unknown. In November world leaders reached an agreement that aims to accelerate emissions cuts. The IEA’s forecast for oil demand over the next three decades depends on the extent to which governments adhere to climate commitments.

Energy traders and analysts say Omicron will not deal the kind of blow to oil prices from the first coronavirus shutdown, when US crude futures briefly turned negative. One reason is that demand for oil from the petrochemical industry is offsetting a drop in jet-fuel consumption. By giving a further boost to oil demand, rising natural gas prices in Europe and Asia encouraged utilities to burn fuel oil and coal to generate electricity.

“Investors have recently sold oil to lock in profits, with Omicron’s potential impact on demand driving prices less than reasonable,” said Rebecca Babin, senior energy trader at CIBC Private Wealth US. Have a wonderful year. said.

A fall in demand can help create a buffer of supply. Cuts by the Organization of the Petroleum Exporting Countries and Russia have drained reserves in a group of predominantly prosperous countries, below the five-year average in members of the Organization for Economic Co-operation and Development. There are doubts about the cartel’s ability to ease those restrictions after declining production spending during the pandemic.

“There are countries that don’t have excess capacity,” said Amrita Sen, founding partner of consulting firm Energy Aspects. Meanwhile, he said, the prospect of a revised nuclear deal that lifts sanctions on Iranian oil exports appears to be fading.

One country struggling to pump oil: Nigeria, Africa’s biggest supplier, whose crude plays a key role in balancing international markets. According to the IEA, it produced 1.29 million barrels of crude a day in November, 360,000 barrels short of OPEC quotas. The agency says operational problems, sabotage and pipeline leaks could hamper production recovery.

However, drilling activity in the US is accelerating. Leading the way are private producers, which have garnered market share from publicly traded rivals, under pressure from investors to pay dividends rather than sprinkle money over wells. Edward Morse, head of commodity research at Citigroup, said the demand for oil should be met with increasing production in countries including Canada and Brazil.

Some banks anticipate another uptick in oil prices in the coming years due to lower investment in fossil fuels. Citigroup’s Mr Morse is skeptical, saying that the adoption of electric vehicles will, among other factors, limit growth in demand starting in 2023 or 2024.

This story has been published without modification to the text from a wire agency feed