By Myra P. Saefong
Major oil producers face a difficult decision on production levels Thursday as a recovery in energy demand hit a setback with the discovery of a new variant of the coronavirus that causes COVID-19.
“This week’s meeting of OPEC+ ministers is shaping up to be one of the most significant since the pandemic demand recovery began, and the key signal will be how much more oil will be added to supply to start the new year,” Peter McNally, vice president and global lead at Third Bridge, told MarketWatch.
The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, are expected to decide on production levels for the month of January on Thursday. The group of producers holds technical meetings ahead of each ministerial meeting to provide analysis, research and recommendations ahead of the official gathering. This week, those will be held on Wednesday and Thursday.
In a media advisory , OPEC offered this week’s schedule, suggesting that the “current restrictions and challenges related to the COVID-19 pandemic” was taken into account as the group set the dates and times of the meetings.
Until about a week ago, oil traders and analysts mainly assumed that OPEC+ would likely push forward their current output plan into January, raising production each month by 400,000 barrels per day.
However, on Nov. 23, President Joe Biden announced a plan to release 50 million barrels of oil from the U.S. Strategic Petroleum Reserve in an effort to “lower prices for Americans and address the mismatch between demand and exiting the pandemic and supply.” The elease of oil from the SPR would run parallel with other major oil consuming nations, including China, India, Japan, South Korea and the U.K.
A release from U.S. the oil reserve had been expected, and prices advanced on the day of the announcement.
But on Nov. 26, news of the discovery of a new variant of the coronavirus pulled U.S. benchmark West Texas Intermediate crude down by just over 13% to mark the biggest one-day drop for a front-month contract since April 2020. That’s the same month WTI futures prices settled below $0 a barrel for the first time on record.
“While the demand impact of the omicron variant so far is minuscule, the dramatic selloff is based on fear of the worst,” said Matthew Parry, head of long-term analysis at Energy Aspects.
So far, governments have been quick to impose border and travel controls in response to the variant, he said. “Unless the vaccines prove ineffective against omicron, the crude selloff is overdone.”
Negotiations to restore the 2015 Joint Comprehensive Plan of Action, known as the Iran nuclear deal, were also held on Monday, with a tweet from Russian Ambassador Mikhail Ulyanov noting that the talks “started quite successfully.” If a deal is eventually reached, that’s expected to lead to an easing of sanctions on Tehran and more oil on the global market.
All in all, this is a “textbook example of how investor concerns and expectations can shift abruptly,” said Pavel Molchanov, director and equity research analyst at Raymond James.
“Until the middle of last week, the overriding concerns for most investors revolved around supply chain tightness and inflation, and…governments around the world had tapped strategic petroleum reserves to push down oil prices,” said Molchanov. But the omicron variant has the potential to “undo some of the economic reopening and revival seen since the start of the year.”
Molchanov told MarketWatch that OPEC, for now, is likely to take “omicron in stride, and reaffirm the existing policy of gradual production normalization by mid-2022.”
However, Marcus McGregor, director and research analyst at global asset manager Conning, warned that if the omicron variant “proves more elusive, leading to a fresh set of lockdowns and disrupts global economies, the outlook for oil would turn negative.”
Oil prices on Tuesday marked their largest monthly percentage decline since March 2020, according to Dow Jones Market Data.
On Tuesday , January West Texas Intermediate crude /zigman2/quotes/211629951/delayed CL.1 -2.38% fell $3.77, or 5.4%, settle at $66.18 a barrel on the New York Mercantile Exchange, down nearly 21% for the month of November. January Brent crude ended at $70.57 a barrel on ICE Futures Europe, down $2.87, or 3.9%, on the contract’s expiration day, posting a monthly loss of over 16%.
The weakness in oil prices may lead the OPEC+ consortium to consider easing output for January, said McGregor. The group may also decide to maintain the 400,000 barrel per day monthly increase, he said.
OPEC+ is most likely to pause increases in January 2022, McGregor said, but it’s “hard to say given the level of uncertainties” regarding the omicron variant.