Oil prices dropped towards $73 a barrel on Wednesday after the International Energy Agency (IEA) said the emergence of the Omicron variant of COVID-19 would allow supply to overtake global oil consumption thereby easing the supply tightness of the recent months.
Brent crude futures dropped 98 cents on Wednesday, or 1.32 percent, to $73.41 a barrel by 1405 GMT. U.S. West Texas Intermediate (WTI) crude futures lost 93 cents, or 1.3percent, to $70.36. This development comes after the IEA trimmed its 2022 supply forecast from non-Organisation Petroleum Exporting Countries (OPEC) producers by 100,000 barrels a day and cut its demand forecast by the same amount, saying it expects the surge in coronavirus cases to stymie the recovery in global demand.
In its Oil Market Report, the IEA said global oil demand was now expected to rise by 5.4 million barrels per day in 2021 and 3.3 million barrels per day in 2022 to hit pre-pandemic levels of 99.5 million barrels per day globally. But the recovery is expected to be affected by a new surge in COVID-19 cases, with jet fuel being hit hard, the report said. Its authors noted that the emergence of the new Omicron variant had already brought about new restrictions on international travel.
However, the IEA added that while the rise in new COVID-19 cases was expected to slow demand, the recovery that is already underway was not expected to be completely derailed. Despite this uncertainty, production is poised to outpace demand from December, the report said, led by increased output from the U.S. and OPEC+ countries. This upward trend would extend into 2022, the IEA said, with the U.S., Canada and Brazil set to pump at their highest annual levels ever.
“Saudi Arabia and Russia could also hit records if remaining OPEC+ cuts are fully unwound,” the IEA said. “In that case, global supply would soar by 6.4 mbpd next year compared with a 1.5 million bpd rise in 2021.” The IEA’s outlook conflicts slightly with OPEC+ expectations. The oil-producing consortium put out its own report on Monday, and was more optimistic than the IEA on demand recovery next year.
OPEC+ predicted that the Omicron variant would have a mild impact on oil markets, and said it expects demand to reach 100 million barrels per day by the third quarter of 2022. It also raised its demand forecast for the first quarter of 2022 by 1.1 million barrels per day. In November, OPEC+ lifted its crude output by 500,000 barrels per day, as it unwound the output cuts it agreed upon in the early stages of the coronavirus crisis.
The organisation agreed in the spring of 2020 – as oil prices plummeted in the face of the pandemic — to cumulatively cut almost 10 million barrels per day of crude production. With regards to oil prices, the IEA also revised its outlook downward. “Our oil price assumption (based on the forward curve) is roughly 15 percent lower for 2022 than in last month’s report,” the report’s authors said. “Brent prices average $70.80/bbl in 2021 and $67.60/bbl in 2022.”