What’s Affecting Oil Prices This Week? (Dec. 20, 2021)

[Editor’s note: This report is an excerpt from the Stratas Advisors weekly Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.]

Last week, the price of Brent crude ended the week at $73.52 after closing the previous week at $75.27. The price of WTI ended the week at $70.36 after closing the previous week at $71.96. The market responded negatively to the ongoing emergence of Omicron and the increased signs that central banks are shifting to less accommodating monetary policies.

We are expecting that the market will continue to be pessimistic and that oil prices will remain under pressure. During the previous week, the sentiment pertaining to the latest variant of COVID-19, Omicron, reverted to being more negative, even while the data were still mixed. While cases are moving upward in many countries, it is not clear that the rate of hospitalizations and deaths are increasing at the same rate.

• Cases in Germany decreased by 21% and deaths increased by 17%.
• Cases in the U.K. increased by 71%, while deaths decreased by 6%.
• Cases in France increased by 23% and deaths increased by 65%.
• Cases in Italy increased by 62% and deaths increased by 55%.

Cases are increasing in the U.S. with cases continuing to increase at the greatest rate in the Northeast region. Overall, cases in the U.S. increased by 21%, hospitalizations by 16%, and deaths increased by 9%.

The possibility of aggressive policy reactions to any threat of a rebound in COVID-19, has long been a risk—and more than ever, remains so. This risk is explicitly illustrated by the Netherlands announcing on Dec. 18 the implementation of a strict lockdown until Jan. 14. The lockdown is being announced while average daily cases have dropped by more than 35% since the peak that was seen on Nov. 25. It is also interesting to note that the Netherlands has a vaccination rate of 85%, but only 9% of the population has received the booster—which is one of the lowest rates in Europe.

The other risk being faced by the oil markets is increasing inflation and the threat of tightening by the central banks. The first major central bank to move is the Bank of England, which voted on Dec. 16 to increase rates to 0.25% from the current 0.1%, while stating that the rate increase is justified by a strong labor market. The U.S. Federal Reserve is also expressing the desire to start raising interest rates with the Fed Chairman stating on Dec. 15 that the Federal Reserve will accelerate tapering of its bond-buying program, which will be completely wound down by the end of first-quarter 2022. Furthermore, the chairman indicated that the Federal Reserve is considering several rate increases in 2022. Apparently, the central banks of the U.K. and the U.S. do not think that Omicron will have a significant impact on economic activity. It is interesting to note that the U.S. 10-year treasury has dropped to 1.41% from a recent high of 1.66%.

From a global perspective, we are currently forecasting that the oil demand growth for fourth-quarter 2021 (in comparison with third-quarter 2021) will be 620,000 bbl/d and another 680,000 bbl/d in first quarter of next year. With the advent of Omicron there is an increased downside risk associated with our demand forecast. Most of demand growth during this period is associated with Asia and the Middle East, while demand growth in Europe and North America is less so because of the seasonality associated with demand. There is obviously the risk of additional lockdowns in Europe (and other regions)—besides the lockdown recently announced by the Netherlands. At this time, however, we still think the response to Omicron, for the most part, will be muted in terms of limiting economic activity. The rationale is that focus will be on ramping up booster shots and encouragement to wear masks—as long as the rate of hospitalizations does not spike—which we think is less likely because of the extent of vaccinations and that Omicron seems to result in milder cases.

About the Author:

John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.