Oil Continues Rollercoaster Ride As OPEC Considers Omicron Impact On Fuel Demand

Oil Continues Rollercoaster Ride As OPEC Considers Omicron Impact On Fuel Demand

As OPEC ministers convened digitally on Wednesday, the rollercoaster ride in oil markets continued, with U.S. West Texas Intermediate crude oil up 3% to $68 per barrel amid broad strength in equities. 

Recall that on Friday oil fell more than 10%, and is down 20% since peaking at $85 in late October — now technically in a bear market. 

Expect gasoline prices to soon follow suit, thus giving President Biden reason to credit his decision last week to release 50 million barrels from the strategic petroleum reserve. 

Of course correlation is not causation. As we wrote last Friday, Biden’s move was too small to really do anything to oil markets other than reconfirm to American frackers that the White House is not their friend. 

Neither is OPEC particularly impressed, with oil ministers reportedly dismissing the impact of the move as “muted” given that governments will end up purchasing more oil next year to replace about 70 million barrels sold into the market. Worldwide demand is roughly 95 million bpd. 

The big question the OPEC+Russia ministers will address on Thursday is whether to continue its normalization strategy of adding back each month a cumulative 400,000 barrels per day of the more than 5 million bpd they chopped from supplies as Covid hit in 2020.

This had seemed to be a good pace given relatively tight inventories and strong oil demand growth. Then came the Covid Omicron variant. So far OPEC sees the biggest potential impact of Omicron to be reduction in demand for jet fuel in Africa and Europe. 

But traders appear to be more pessimistic. In a research note, the Goldman Sachs

oil team led by analyst Damien Courvalin says that the recent oil selloff, triggered by fears of resurgent Covid, is pricing in “a dire demand outlook” implying 7 million bpd of demand evaporating from the market over the next three months — with no response from OPEC+. This “excessive repricing” is so extreme we would need to see no planes flying for three months and lockdowns half as intense as 2020 in order to justify. Even with continued virus complications and SPR releases, the Goldman team sees oil averaging $80 in 2022. 

OPEC+ also sees a likelihood of a significant oil surplus building in early 2022 — with the risk being high enough that analyst Robert Yawger at Mizuho predicts that the group will decide to pause its supply additions. 

Meanwhile, analyst Louise Dickson at consultancy Rystad expects OPEC+ to stay the course and keep adding supply. She sees oil averaging $65 in 2022. 

Looking for a low-risk way to play this volatility? Goldman’s Neil Mehta says to buy refiners. His top picks are Marathon Petroleum

(MPC) and especially Phillips 66

(PSX), which is trading at 10 times earnings, 6 times 2022 forecast ebitda, and yields 5.3%. PSX was in the dog house with investors following some operational hiccups, but Mehta now sees it having the best upside potential. Naturally, shares are up nearly 4% this morning. 

Won’t the refiners be hurt when gasoline prices come down? More like “if.” Analyst Matthew Blair at Tudor, Pickering & Holt points out that although today’s $3.40/gallon gasoline is the most expensive since 2014, when adjusted for inflation the prices are “pretty modest.” Instead, considering improvements in fuel economy and wages, “it’s even cheaper to take a long road trip now” than a decade ago. That’s bullish for gasoline prices.

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