Oil prices rose on Friday after Opec+ said it could review its policy to increase output at short notice if a rising number of coronavirus infections, spurred by the Omicron variant, chokes off demand.
Brent and West Texas Intermediate futures jumped as high as $72.48 per barrel and $69.13 per barrel, respectively, during early morning trading on Friday.
The benchmarks later softened their gains. Brent, the international benchmark, was up 0.30 per cent to $69.88 when markets closed on Friday. WTI was 0.36 per cent down at $66.26 per barrel.
Opec+, the group led by Saudi Arabia and Russia, decided on Thursday to increase output by 400,000 barrels per day for the month of January, despite demand concerns stemming from the spread of the Omicron variant. However, it agreed to continue monitoring the market closely and make immediate adjustments to its output policy if required.
Oil markets are “buoyed by the caveat in the Opec+ statement that allows them to make immediate adjustments before the next meeting should they see fit once more information on Omicron is available”, Craig Erlam, a senior market analyst for the UK and Europe, the Middle East and Africa at Oanda, said.
“The group has previously stated that winter surges were baked into their forecasts but Omicron threatens to be much more than that if it evades vaccines and the flexibility was probably necessary to keep all parties on board with raising output as planned in January.”
Omicron, which has been designated a “variant of concern” by the World Health Organisation, has now been detected in 38 countries around the world with infections continuing to jump on a daily basis, forcing countries to reimpose travel restrictions to contain the spread of the pandemic.
India, one of the top consumers of oil, has postponed the resumption of international flights from December 15. The EU, the US, the UK and Canada have all imposed travel restrictions on visitors from countries in southern Africa.
The UAE also suspended entry of travellers from seven southern African countries due to concerns over the new Covid-19 variant.
“There are two key reasons behind the decision to increase production. First, it eases tensions with the US administration that have been building up in recent months that led to the co-ordinated SPR [strategic petroleum reserve] release,” Ehsan Khoman, head of emerging markets research at MUFG Bank, said.
“Second, lower oil prices will disincentivise US shale producers to raise the capital expenditure plans as they recalibrate their portfolios for 2022. In the past, Opec+ has delivered a bullish strategy into year-end, which had offered the space for US shale players to be more assertive in their spending levels for the following year.”
US President Joe Biden last week announced that he ordered 50 million barrels of oil to be released from the country's strategic petroleum reserve to help bring down energy costs, in co-ordination with other major energy-consuming nations, including China, India and the UK.
The Strategic Petroleum Reserve is an emergency stockpile to preserve access to oil in case of natural disasters, national security issues and other events.
MUFG Bank expects the oil market to return to a structural deficit by 2023 as countries focus on energy transition and cut investment in the sector.
“With upstream Capex continuing to run at low levels, our initial read on 2023 balances signals that the market will return to a deficit in that year,” Mr Khoman said.
head of emerging markets research at MUFG Bank
Last week, global investment bank JP Morgan said the underinvestment in the sector over the past 18 months caused by the coronavirus pandemic hit the output capacity of many producer countries and their ability to respond to recovering oil demand.
It predicted Brent to "overshoot" $125 a barrel next year and $150 in 2023 due to a lack of adequate investment in the sector.
The latest Opec+ decision provides “relief for importers” as well as balances the fiscal budgets of the largest oil exporters including Saudi Arabia and Russia, said Hasnain Malik, strategy and head of equity research at Tellimer Research.
“The credible threat of a quick change in output policy may place a floor on oil prices unless data on Omicron-driven hospitalisation and fatalities or the effectiveness of existing vaccines against Omicron proves far worse than initial indications.”
