The economic impact from the Omicron variant of the coronavirus and geopolitical tensions over Ukraine could drive the price of oil this week, analysts said.
Oil was down 5 percent in morning trading, falling below $68 a barrel, on top of the 1 percent oil lost last week. Oil was flirting with $83 per barrel in early November.
Ole Hanson, the head of commodity strategy at Danish investment firm Saxo Bank, said it was becoming evident that the highly contagious omicron variant of the coronavirus that causes COVID-19 is having an impact on the economy and energy demand.
Denmark, for example, has one of the highest vaccination rates in the world but is heading into a partial lockdown, he said.
“Until we know more and hopefully get confirmation of its limited impact, the market will worry about the demand outlook,” he said. “But longer-term expectations for higher prices are clearly on hold for now.”
New York on Friday recorded the highest number of positive cases since the pandemic began. Paris on Saturday opted to cancel New Year celebrations and the World Health Organization said the number of new cases of COVID-19 is doubling in 1.5 to 3 days in areas with community transmission.
Even with the resurgence, demand is holding up in the U.S. market, but that strength likely won’t last. The Energy Department said last week that it expected the market to tilt to surplus next year and the futures curve for Brent, the global benchmark for oil, shifted into backwardation last week. Backwardation is a situation where future prices are lower than current levels — pointing to a coming glut.
Caroline Bain, the chief commodities economist at London-based Capital Economics, said that she’s curious to see if OPEC and its allies, a group known as OPEC+, will act to stop the trend lower for crude oil prices by halting its modest monthly production increases or even cutting output.
“We have to remember that OPEC+ left its last meeting ‘in session’ so it could change its output policy before its next meeting on Jan. 4 if it thinks Omicron is now posing a risk to demand,” she said.
Elsewhere, Western powers are growing increasingly agitated that a Russian military buildup on the border of Ukraine, a former Soviet republic, signals an imminent invasion. Moscow has tried to nibble away at Ukraine’s territory at least since the 2014 annexation of the Crimean Peninsula and western leaders say they have had enough.
Washington is pushing for a diplomatic solution to the crisis, calling on European, Russian and Ukrainian players to have a role in conflict resolution. But continued sanctions pressure on Russia, particularly its energy sector, and warnings of severe consequences should Russia use force to alter Ukrainian borders could rattle the broader market.
“There's already talk that the Biden administration is getting prepared to put sanctions on Russia's energy industry,” said Phil Flynn, a senior energy analyst at The PRICE Futures Group in Chicago. “They're also talking about sending military equipment to Ukraine.”
On the economic front, meanwhile, Flynn said action from central bank officials could have an impact on demand. The U.S. Federal Reserve said recently that it would raise its key interest rate in the future and the British central bank last week raised its interest rate for the first time in three years.
Higher interest rates could cool inflation, but, in doing so, have other consequences.
“The oil market seems a bit concerned that if global central banks act too aggressively to slow the economy, they could actually hurt oil demand at some point down the road,” Flynn added.
The next couple of weeks will see light trading levels ahead of the long Christmas and New Year weekends. The Federal Reserve already lowered its growth estimates for next year so traders will be eager to see the final reading of third quarter growth in U.S. gross domestic product on Wednesday. A reading of consumer sentiment rounds out the week.