Oil Futures Rebound After Rout as Traders Eye OPEC+ Meeting

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange reversed higher in early trade Wednesday, sending U.S. and international oil benchmarks as much as 4% higher as investors continue to assess the near-term demand implications from new COVID-19 variant omicron and potential supply response from Organization of the Petroleum Exporting Countries and partners outside of the cartel that meet later this week. Expectations are growing that the alliance will pause planned output increases to arrest the decline in oil prices.

Oil's early surge came on the back of an emerging consensus that OPEC+ would kick back a planned production increase of 400,000 barrels per day (bpd) until February 2022 amid an alarming surge in winter infections across the Northern Hemisphere. Adding fuel to the fire, the omicron COVID-19 variant contains a high number of mutations that may render existing COVID-19 vaccines less effective against the new strain should it prove more transmittable than the delta variant.

Fresh concerns over vaccine efficacy were raised by Moderna CEO Stephanie Betel on Tuesday, who suggested it might take months to develop a new vaccine, scale up production and distribute the vaccine, throwing cold water on the pace of the global economic recovery. On the flip side, a number of scientists suggest viral mutations may not be a bad development after all if they lead to milder illness and higher transmission rate. This would affectively allow omicron to replace a deadlier delta variant as a dominant strain.

There is still a lot unknown about the virus, but the consensus is calling for international air travel to take a big hit from renewed travel controls as consumers pull back on flying. S&P Platts Analytics estimates that for every reduction of 10,000 flights, global jet fuel demand would be reduced by 600,000 to 700,000 bpd. Combined with seasonal weakness and tighter travel restrictions, global oil demand will likely contract by a sharp 1.6 million bpd from the fourth quarter to the first quarter of 2022, according to Platts.

OPEC+ has so far downplayed the risk from the omicron variant, describing the recent selloff as "extremely emotional and short-lived response" without any support from scientific data. Russia's Deputy Minister Alexander Novak said this week that he doesn't see any need for urgent action by the OPEC+ alliance and there are no proposals by other OPEC+ countries to revise strategy or increase output.

"So far, the dynamics of global oil reserves studied weekly by the alliance are still normal. We will additionally discuss the market situation and the need for measures with the OPEC+ countries," Novak said. "The Joint Ministerial Monitoring Committee was rescheduled in order to work out everything in detail, to get more information about current events, including on a new variant of the virus."

The JMMC will now be held on Thursday followed by a meeting of OPEC ministers and then non-OPEC countries, including Russia, later in the day. OPEC+ is gradually unwinding their record 9.7 million bpd production cuts that were put in place in April 2020 in 400,000 bpd monthly installments. OPEC+ still has about 3.8 million bpd of these cuts in place and some analysts suggest that should the coalition choose to support prices against the threat of the emerging variant, it might forgo planned increases until February, buying more time for the market to recover.

Domestically, the American Petroleum Institute reported on Tuesday U.S. commercial crude oil supplies decreased 747,000 barrels (bbl) in the week ended Nov. 26 compared with calls for an 800,000 bbl draw. The report shows stocks at the Cushing, Oklahoma, hub rose 1 million bbl. Gasoline stockpiles increased 2.2 million bbl in the week ended Nov. 26 versus estimates for stocks to have declined by 500,000 bbl. API data show distillate inventories rose 800,000 bbl, missing calls for supplies to have remained unchanged.

Near 7:30 a.m. EST, West Texas Intermediate January futures advanced $2.94 bbl to trade near $69.13 bbl and International benchmark ICE February Brent contract rallied to $72.54 bbl, up $3.31 bbl on the session so far. NYMEX RBOB January futures surged 9.2 cents to $2.0316 gallon and the new front-month NYMEX ULSD contract rallied 9.49 cebts to $2.1569 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges