Oil Prices Fall From 1 Month High on Inventory Overhang

Oil prices in the last few years has been seeing some key underlying shifts. OPEC has seen a sharp reduction in its share of daily oil output and the swing producer status has shifted from Saudi Arabia to the US and Russia. Brent Crude had scaled above $86/bbl in October but subsequently as the Omicron fears caught on, the price of Brent fell all the way to $68/bbl. It has now bounced to $80/bbl, but the pressure is visible.

On 05-Jan, the price of Brent fell as the US reported rising fuel stockpiles. Normally, rising stockpiles are a signal of weak demand. The US economy has seen declining demand for oil due to the spike in COVID-19 cases caused by the Omicron variant. This has constricted demand for oil. In fact, the US gasoline stockpiles spiked by 7.1 million barrels as of end of December even as the stockpiles of distillates also spiked by 4.4 million barrels.

However, the fall was not too steep as the price fell below the $80/bbl mark in the Brent market and touched $79.72/bbl. However, in early trades in oil on Thursday, the price of crude has again gone above the $80/bbl mark. Even the other West Texas Intermediates or the US benchmark oil is trading around $77/bbl in the oil market. A lot will depend on the demand supply balance, but supplies are controlled as OPEC is not boost beyond a point.

One of the most credible signals of the future direction of oil prices is the backwardation, which shows the extent to which the oil futures trades at a premium to the spot price. That backwardation has been falling in the Brent market, which indicates that traders and investors continue to be sceptical about the future price trajectory of oil. In fact, this backwardation has more than halved from $6.30/bbl to $3/bbl over a month.

Oil analysts believe that Omicron would be a lot milder than its earlier version. Hence the impact on demand may not  be too much. However, the series of lockdowns that are expected across the world could disrupt logistics and trade routes and the demand for oil will fall as international travel once again gets restricted. 

OPEC has been under a lot of pressure to boost output to help taper oil prices, but it has always believed that demand concerns could arise. The consortium of OPEC plus Russia will add 400,000 barrels per day of supply in February. OPEC has held on to its view that the impact of the Omicron on economies would be fairly limited.

Also Read: 

Sectors dependent on crude Oil

Crude Oil at $83/bbl – Who Gains and Who Loses

Crude Oil at $75/bbl – Here comes inflation