(Bloomberg) -- Oil clawed back some losses after plunging more than 6% over the previous two sessions on nervousness the rapid spread of the omicron virus variant will lead to more lockdowns and restrictions on movement.
Against this backdrop, the OPEC+ alliance will decide on their supply policy for January later on Thursday. With oil prices already in a bear market as omicron imperils demand, traders widely expect the producer group to defer a modest increase in output. West Texas Intermediate rose toward $67 a barrel in Asia after briefly swinging into the red earlier.
A weakening price structure along the curve suggests crude’s fundamentals have softened. There’s also been a sharp upsurge in volatility, with trading volumes surging and retail investors jumping into the market.
Oil has dropped more than 20% since late October on a White House-led coordinated reserves release and, more recently, the new virus variant. An increasingly hawkish tone from the Federal Reserve is also weighing on the growth outlook for the U.S. economy. A major, as yet unanswered, question is whether existing virus drugs will work against omicron.
“I don’t think we can call a bottom yet until we understand the effectiveness of the vaccines we have today,” said Wayne Gordon, a strategist at UBS AG Wealth Management. The market’s likely to remain volatile in the short term, and a pause in restoring supply looks like the most probable outcome of the OPEC+ meeting, he said.
The first infection of the new strain was detected in the U.S., while cases in South Africa doubled from Tuesday. Still, there are those who think oil’s drop has been overdone. Goldman Sachs Group Inc. said prices have “far overshot” the impact of omicron. Bank of America said it was sticking to its $85-a-barrel forecast in 2022, with possible surges past $100 if air travel rebounds.
Brent’s prompt timespread was 33 cents a barrel in backwardation, a bullish structure where near-term prices are higher than those further out. That’s down from $1.30 a week ago.
OPEC+’s technical experts forecast Wednesday that markets face a surplus in the first quarter that, although smaller than initially thought, remains substantial. However, the outcome of Thursday’s meeting is not certain. Saudi Arabia faces pressure from the U.S. and other key consumers to ensure supplies remain plentiful enough to stave off an inflationary spike. Ignoring that could strain Riyadh’s already-fraught relations with Washington.
The U.S., meanwhile, is sticking to its guns on the reserves sale even as prices crash. There are no plans to alter the announced release of 50 million barrels “in timing or size,” the Energy Department said in statement. American crude stockpiles fell by 909,000 barrels last week, less than the median estimate in a Bloomberg survey, Energy Information Administration data show. Gasoline inventories climbed by more than 4 million barrels.
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