Oil prices falter as more countries revisit restrictions in light of omicron, but all eyes are on China
Despite news that the Omicron Covid-19 variant may not be as destructive to oil demand as first feared, more countries worldwide are reintroducing restrictions and other measures to curb climbing case numbers, raising fears that the global market may yet be adversely impacted, and consequently causing a bearish environment for oil prices.
An announcement from vaccine manufacturers BioNTech and Pfizer, backing their three-shot regimen as providing significant protection against Omicron, was positive news for demand projections but was insufficient to quell concerns from some Covid-cautious nations.
Many countries, even those with robust inoculation rates, are experiencing surges in Covid-19 cases and ICU bed utilization levels, triggering renewed concerns and emergency healthcare measures that could hamper oil recovery – and prices.
What is evident now is that although Omicron may not be as harmful to the global market as initially feared, some transitory implications are inevitable to oil demand, and a consequent effect on prices will be inevitable.
The fundamentals of a weakening physical oil market are beginning to creep into futures pricing, brushing away the optimistic buying spree that we saw in the first three trading sessions of the week.
However, all eyes are on the Chinese economy today over growth and inflation concerns and their potential impact on oil demand.
The headline news of Fitch downgrading Evergrande to “restricted default” exacerbates the Chinese GDP growth fears and ultimately could impact the oil buying appetite of the world’s biggest crude customer.
Elevated inflation rates could stall China’s economic growth momentum, potentially triggering a governmental discussion on economic stimulus measures in 2022.
If realized, this weakened growth in China would likely cause a decrease in crude imports and refinery intake in the country, paving the road for a potential oil price slide.
Loadings to China of Saudi Arabian crude for January 2022 are already at “normal” volumes, another strong signal of a weakening physical market, especially as $75 per barrel Brent is a relative bargain versus the more premium price environment of $80 per barrel and higher in September and October 2021.
This lack of extra demand for crude in China could also signal to Saudi Aramco that the recent bumps in official selling prices (OSPs) were an exaggeration and remain unrealistically high.
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