The oil market has been getting used to volatility in recent weeks, but nothing could have prepared it for the drastic drop in price by close of trading on Friday. Brent crude was down by more than 11 percent to close at US$72.72 with WTI holding above US$68 a barrel.
The oil price has not seen such a drop since April 2020 and the focus is now on how low it might go.
The coronavirus is on the move again with a new variant called Omicron, showing up in Africa and in Europe. Many countries suspended flights and closed borders and there are fears that this will spread and dampen economic activity.
OPEC and friends expect to see ample oil supply in the new year and consequently they have been extremely cautious about the quantity of oil they add to the market.
His Royal Highness Prince Abdulaziz bin Salman Al-Saud, Minister of Energy of Saudi Arabia has cautioned the market for weeks about the ongoing impact of the pandemic. Any slowdown in economic activity will add more oil to the stocks and this is not ideal for anyone.
Earlier in the week, OPEC+ delivered a favourable response to the release of the strategic reserves from some countries led by the USA. Leading OPEC members expressed concerns about using the SPRs in this fashion, but the US was determined to soften the price and urged other countries to follow them. OPEC suggested it could taper production and adjust so that the market might find a balance.
Ministers meet on Wednesday and Thursday this week to decide if they’ll add the planned 400,000 barrels back to the market. Many analysts believe they may hold off for now and review again in January.
The markets have been pricing in the impact of recent lockdowns and the global head of commodity research at RBC Capital Markets, Helima Croft told CNBC that “the market is concerned about government restriction and what that could mean for mobility.”
The big concern is definitely the SPR release, said Croft, who added that this is the biggest release of SPRs by the US at 50 million barrels. This combined with any possible softening in economic activity due to travel bans will impact the oil price. “So we are going to have a lot of barrels hitting this market, just as we have potential new Covid lockdown restrictions.”
Iran is back at the negotiating table on Monday and the country hopes for an easing of sanctions. Adding to the woes of the possibility of excess oil on the market, Iran announced that it plans to boost capacity to 4 million barrels a day by March 2022.
A report on the Shana news service said the plan is to “raise the oil capacity production to what it was by the end of the current year.”
Approximately US$160 billion of investment will be needed, but the managing director of the National Iranian Oil Company, Mohsen Khojastehmehr said in the report that he was confident the money could be raised.
All eyes are now on the OPEC+ technical and ministerial meetings this week. The Saudi Arabia oil minister had warned that the Covid impact was not over; no doubt he’ll be repeating these words loud and clear as he chairs the meeting this week.