Oil Futures Advance Amid Easing Concerns About Omicron Variant

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved lower in early trading Monday following Friday's advance, with a stronger U.S. Dollar Index ahead of this week's Federal Open Market Committee meeting weighing on West Texas Intermediate while the Organization of the Petroleum Exporting Countries maintained their 2022 supply-demand outlook.

"The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges," said OPEC in its Monthly Oil Market Report released Monday morning.

OPEC continues to expect world oil demand to increase year-on-year by 4.2 million barrels per day (bpd) in 2022 following a 190,000-bpd downward revision in this year's demand from its November forecast, with world oil consumption in 2022 projected at 100.59 million bpd following a 5.7 million bpd annual increase this year.

OPEC revised third quarter oil demand down 230,000 bpd to 97.66 million bpd amid an increase in COVID-19 cases, weaker industrial production in China, and a slower-than-expected recovery in transportation fuel in India. OPEC said it also shaved expected demand for the current fourth quarter due to the "potential impact" on demand for transportation fuel from COVID-19 containment measures taken in Europe. OPEC sees any slowing in global oil demand in the fourth quarter spilling into the first quarter 2022.

Oil supply growth from non-OPEC countries for this year is unchanged at 700,000 bpd to 63.7 million bpd, with a 3 million bpd annual increase in 2022 to 66.7 million bpd also maintained. OPEC+ technical committee earlier this month called for global oil production to outpace demand in the first quarter 2022.

The sustained outlook by OPEC runs contrary to the Short-term Energy Outlook released by the Energy Information Administration on Dec. 7, with EIA lowering its 2022 global oil demand outlook by 420,000 bpd to 100.46 million bpd, and world supply forecast by 490,000 bpd to 100.93 million bpd. The International Energy Agency will release its monthly Oil Market Report Tuesday morning.

Despite slowing global oil demand in the fourth quarter due to increased COVID-19 cases compounded with the new Omicron variant, energy prices remain high in Europe. An energy crunch due to low gas supply the continent is experiencing will prompt the European Commission this week at a summit to propose a system for countries in the European Union to jointly procure gas to form strategic reserves of the fuel, according to Reuters citing a document shared with EU countries.

The FOMC will meet Tuesday and Wednesday in a highly anticipated meeting following growing inflation, which spiked to a 39-year high in November, prompting heightened criticism that the Federal Reserve has moved to slow in reining in monetary stimulus. During the Nov. 2-3 FOMC meeting, central bank officials agreed to begin tapering $120 billion per month in treasuries and mortgage-backed securities by $15 billion a month while leaving the federal funds rate near zero. Expectations are for the central bank to agree to more quickly taper these purchases to set the stage for lifting interest rates.

CME Group's FedWatch Tool sees a 35% probability of a hike in the federal funds rate during the FOMC's March 2022 meeting, which increases to 55% in May 2022. Market expectations are for two rate hikes in 2022.

In early trading, NYMEX January WTI futures were down $0.67 at $71 per barrel (bbl), and February Brent futures on ICE were down $0.75 at $74.40 bbl. NYMEX January ULSD futures eased 0.65 cents to $2.2450 gallon, and January RBOB futures fell a like amount to $2.1305 gallon.

Brian L. Milne can be reached at brian.milne@dtn.briancom

Brian Milne