Oil Futures Continue Rally on Fading Fears Over Omicron

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended gains into early trade Tuesday, with U.S. crude benchmark trading above $71 per barrel (bbl) following preliminary research data suggesting the Omicron variant of coronavirus induces mild cases of the disease, prompting investors to reassess their expectations for near-team demand recovery.

Oil prices clawed backed most of their losses since the Black Friday selloff Nov. 26, as investors and the general public appear to be reassessing the threat posed by the new variant of coronavirus. Early research data showed that while the highly mutated strain is more contagious, it is less likely to induce severe cases of COVID-19 disease. The variant is now found in over 45 countries around the world and not a single fatality has been related to the virus so far, according to data published by the World Health Organization. Optimism is growing among investors that the worst is likely over regarding concerns surrounding the Omicron variant.

The recent sell-off that sent oil prices crashing by more than 20% over the last two weeks appear to be overdone, according to analysts. Emerging reports are cementing a view that governments will not see the same scale of fatalities and hospitalizations that characterized earlier variants.

U.S. equity futures surged, and U.S. Dollar Index continued its recent rebound as investors repositioned for a lesser adverse economic impact from the new variant. Goldman Sachs economists, however, still cut their forecast for U.S. economic growth for this year and 2022, citing risks and uncertainty around the emergence of the Omicron variant. Investment bank downgraded 2022 U.S. gross domestic product growth to 3.8%, down from 4.2% previously, and cut its fourth quarter growth outlook 0.4% to 2.9%.

One of the biggest risks posed by the new variant is hotter inflation through further supply chain disruptions, with inflation having reached a 30-year high 6.2% in the 12 months ending in October. Investors now await the release of the Consumer Price Index -- a measure for inflation, scheduled for release Friday morning, with expectations for price pressures in November to have eased monthly to 0.7%.

"The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation," Federal Reserve Chairman Jerome Powell wrote in prepared testimony he's set to deliver to the U.S. Senate Committee on Banking, Housing, and Urban Affairs Tuesday.

Also lending price support for the oil complex for a second session is Saudi Aramco's latest price hikes for Asian and U.S. refineries that have signaled the company's confidence in a demand recovery for early next year. The biggest price increases were for Medium and Heavy grades to Asian buyers.

Aramco boosted its Medium grade to Asia by 70 cents to a $3.05 bbl premium over Oman/Dubai and its Heavy grade by 80 cents/bbl to a $1.80 bbl premium. Super Light was raised by 30 cents bbl to a $6.15 bbl premium while Extra Light was increased to a $4.50 bbl premium.

For U.S.-bound crudes, Aramco boosted its Extra Light OSP by 60 cents/bbl to a $3.50 bbl premium.

Higher premiums can be viewed as a sign of robust demand, supporting last week's decision by the Organization of the Petroleum Exporting Countries and their allies to raise oil production by 400,000 barrels per day (bpd) in January in spite of concerns related to the Omicron variant. OPEC+ said they are ready to reconvene at any point should demand outlook deteriorate due to the new variant.

OPEC+ currently withholds about 3.8 million bpd from the global market, while gradually unwinding those cuts through monthly installment of 400,000 bpd.

Near 7:30 a.m. ET, West Texas Intermediate January futures rallied more than $2 bbl to trade at $71.72 bbl and the international benchmark ICE February Brent contract advanced $1.93 to $75.02 bbl. NYMEX RBOB January futures surged 5.71cts or 2% to $2.1004 gallon, and the front-month NYMEX ULSD contract strengthened to $2.2205 gallon.

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

Liubov Georges