Oil prices have recorded their biggest weekly decline in over six months, plunging by more than 10% amid renewed concerns over the global demand outlook and the impact of the Omicron variant. The first and most obvious reason for the oil price slump is the emergence of the new Omicron variant of Covid-19, which has triggered travel bans, lockdowns and uncertainty across the world.
The variant, which was first detected in South Africa, has been reported in dozens of countries and is believed to be more transmissible than previous strains. The World Health Organization (WHO) has declared it a variant of concern and warned that it poses a “very high” global risk.
The fear of a new wave of infections and restrictions has dampened the outlook for oil demand, especially in the transportation sector, which accounts for about 60% of global oil consumption. According to the International Energy Agency (IEA), global oil demand is expected to grow by 5.5 million barrels per day (bpd) in 2021 and 3.3 million bpd in 2022, but these projections could be revised downward if the Omicron variant proves to be more severe or resistant to vaccines.
The second factor behind the oil price decline is the decision by the Organization of the Petroleum Exporting Countries and its allies (OPEC+) to stick to their plan to increase production by 400,000 bpd every month until July 2023. The Organization of Petroleum Exporting Countries (OPEC) has sought to influence global oil prices by limiting the supply of crude for decades, with varying degrees of success.
The OPEC+ decision reflects its confidence that the oil market remains tight, and that demand will recover as the Omicron situation stabilizes. The group also believes that its spare capacity, which is estimated at around 6 million bpd, gives it enough flexibility to respond to any changes in market conditions. However, some analysts argue that OPEC+ is risking a repeat of the 2014-2016 oil price crash, when it failed to cut production in response to a demand slowdown and a surge in US shale output.
The third factor behind the oil price decline is the increase in US crude inventories, which rose by 3.4 million barrels last week, according to the Energy Information Administration (EIA). This was the first weekly build since October and contrasted with market expectations of a drawdown. The rise in US stockpiles suggests that domestic demand is weakening amid high gasoline prices and lower travel activity due to the Thanksgiving holiday and the Omicron scare.
Is the world order cause of decline in oil price globally? This is a question that many people are asking, especially in the wake of the recent OPEC+ meeting, where the major oil-producing countries agreed to increase their output gradually over the next few months. The decision was seen as a compromise between the competing interests of Saudi Arabia, which wanted to maintain tight supply and high prices, and Russia, which wanted to boost production and market share.
However, some analysts argue that the OPEC+ deal is not enough to reverse the long-term trend of declining oil prices, which is driven by deeper structural factors beyond the control of any cartel or country. One of these factors is the changing world order, which is characterized by the rise of new powers, such as China and India, and the relative decline of old ones, such as the US and Europe. These shifts have profound implications for the global demand and supply of oil, as well as the geopolitics and security of energy markets.
The US is the world’s largest oil consumer and producer, so any changes in its supply and demand dynamics have a significant impact on global oil prices. The US shale industry, which has been recovering from the pandemic-induced slump, could also face challenges if oil prices remain low for a prolonged period. According to Baker Hughes, the US rig count, which is a proxy for drilling activity, fell by five last week to 521, the first decline in nine weeks.
Oil prices have recorded their biggest weekly decline in over six months due to a combination of factors, including the Omicron variant, the OPEC+ decision and the rise in US inventories. These factors have raised doubts about the strength and sustainability of the oil demand recovery and increased the volatility and uncertainty in the oil market. While it is too early to assess the full impact of the Omicron variant on oil demand and supply, it is clear that the oil market will remain under pressure until more clarity emerges on the situation.
