By Myra P. Saefong and Barbara Kollmeyer
Oil futures settled lower on Wednesday, erasing earlier gains, after the U.S. reported its first case of the omicron variant of coronavirus, which poses a risk of new lockdowns that may lead to lower energy demand.
During a briefing for reporters Wednesday, Dr. Anthony Fauci, President Joe Biden’s top medical adviser, said public health authorities had confirmed that the first U.S. case of COVID-19 caused by the omicron variant was found in California.
Traders also weighed potential outcomes for Thursday’s OPEC+ decision on crude production levels, and digested data Wednesday from the Energy Information Administration, which revealed a smaller-than-expected weekly decline in U.S. crude inventories.
The turn lower for prices late in the session was linked to growing concerns over COVID-19, and the potential for the new variant to disrupt economic activity and oil demand, said Tariq Zahir, managing member at Tyche Capital Advisors.
Investors were also focused on a pending decision on output levels by the Organization of the Petroleum Exporting Countries. OPEC and its allies, together known as OPEC+, will hold a ministerial meeting on Thursday.
Zahir said told MarketWatch he expects OPEC+ to pause the monthly 400,000 barrel-per-day increase that’s currently in place. “We are still in a wait-and-see mode with the severity and impact of the new COVID strain,” he said.
Any travel restrictions resulting from the new variant could impact oil demand going forward, said Zahir. “Until we get a clear understanding on the impact of the new COVID strain, oil…will be choppy.”
Oil will see “increased volatility both to the upside and downside on headlines,” Zahir said.
West Texas Intermediate crude for January delivery /zigman2/quotes/209723049/delayed CL00 -0.02% fell 61 cents, or 0.9%, to settle at $65.57 a barrel, down from an intraday high of $69.49. The contract slumped 5.4% on the New York Mercantile on Tuesday .
November marked the biggest monthly declines for front-month WTI — down 21% — and Brent crude — off 16% — since March 2020, the start of the COVID-19 pandemic as per the World Health Organization. The following month, WTI crashed below zero dollars a barrel .
February Brent crude , the global benchmark, lost 36 cents, or 0.5%, to $68.87 a barrel on ICE Futures Europe, following a loss of nearly 5.5% Tuesday.
The Energy Information Administration reported on Wednesday that U.S. crude inventories fell by 900,000 barrels for the week ended Nov. 26.
On average, analysts had forecast a 2.7 million-barrel decline, according to a poll conducted by S&P Global Platts. The American Petroleum Institute on Tuesday reported a 747,000-barrel decrease, according to sources.
The EIA also reported weekly inventory increases of 4 million barrels for gasoline and 2.2 million barrels for distillates. The S&P Global Platts survey expected supply climbs of 900,000 barrels gasoline and 1 million barrels for distillates.
The “unexpected and rather large build” in gasoline and at the Cushing, Okla., storage hub were surprises, Zahir told MarketWatch.
On Nymex Wednesday, January gasoline settled a penny higher at $1.951 a gallon, while January heating oil rose 0.8% to $2.077 a gallon.
EIA data showed crude stocks at the Cushing, Okla., Nymex delivery hub edged up by 1.1 million barrels for the week.
Meanwhile, OPEC held technical meeting on Wednesday and was scheduled to hold another on Thursday, just ahead of the OPEC and non-OPEC ministerial meeting, which is also set for Thursday.
In his opening address to the OPEC Conference Wednesday , Dr. Diamantino Pedro Azevedo, Angola’s minister of mineral resources and petroleum and president of the OPEC Conference, said the COVID-19 pandemic “remains a persistent foe which continues to spook the markets,” and that the “sudden appearance of a potentially new and more dangerous variant comes on top of new lockdowns” in parts of Europe.
“Bottom line for oil, omicron is causing significant volatility in the energy complex as the impact on demand is not yet known, but traders seem to be fearing the worst so far this week, especially given the lack of clarity on how OPEC+ will react to the latest COVID and [Strategic Petroleum Reserve] release developments at their policy meeting this week,” analysts at Sevens Report Research wrote in Wednesday’s newsletter.
“WTI futures have become oversold, and support in the mid-$60 [a] barrel area, which dates back to the August lows, remains intact,” they said. “This suggests we may see the market stabilize or even bounce from here.”
Along with other global assets, oil has been on a roller coaster since Friday’s announcement of the new omicron variant of coronavirus by South African scientists. Oil slumped Friday, rebounded Monday, then fell again on Tuesday after Moderna /zigman2/quotes/205619834/composite MRNA -6.72% CEO Stéphane Bancel cast doubt on the ability of current vaccines to fight the new variant.
In other energy dealings, January natural gas fell 6.8% to $4.258 per million British thermal units ahead of the EIA’s weekly update on U.S. supplies of the fuel due Thursday. The contract slid 5.9% Tuesday, and lost 16% for the month.