Energy

Oil hikes, recovers few losses after the worst day of the year since 2020 April

Oil hikes, recovers few losses after the worst day of the year since 2020 April

Overview:

  • Oil prices rebounded Monday, recouping some of Friday’s steep losses
  • S. oil fell 13% on Friday, its lowest level since April 2020, as concerns about the omicron variant’s influence on demand drove prices soaring
  • “The price drop on Friday seemed extreme,” Commerzbank analysts remarked

Prices rise with the entry of new COVID variant

Oil prices rose on Monday, as traders speculated that Friday’s dramatic sell-off, sparked by fears that the new omicron COVID version will stifle demand for petroleum goods, was exaggerated.

The U.S. oil benchmark, West Texas Intermediate crude futures, rose $1.80, or 2.6 percent, to close at $69.95 per barrel. It traded as high as $72.93 earlier in the day, but the contract drifted lower during the session and was unable to hold the important $70 level.

WTI dropped 13% on Friday, its lowest level since April 2020. For the first time since November 2020, it also finished below its 200-day moving average, a frequently watched technical sign.

Brent crude, the international oil standard, closed at $73.44 per barrel, up 0.99 percent. On Friday, the contract fell 11.55 percent, marking the sixth consecutive week of losses for both it and WTI.

“The price drop on Friday seemed extreme,” Commerzbank analysts remarked. “Undoubtedly, the omicron variety is increasing demand concerns. However, it is still impossible to estimate how much of an impact this will have on demand.”

Oil had been moving lower even before Friday’s dramatic plunge, after WTI touched a seven-year high above $85 in October. Last month, Brent crude reached a three-year high.

Analysts at RBC believe that some of Friday’s sell-off can be attributable to traders locking in profits, given oil’s anticipated 2021 comeback.

In a letter to clients on Sunday, the business claimed that “at least part of the air pocket lower on Friday was a function of winding down risk, potentially for the year.” “Oil traders would rather de-risk and protect the nest egg after a solid 11 months of pricing.”

The Alliance Activities

The price swings in oil come ahead of a crucial meeting between OPEC and its oil-producing partners in January, when the group will decide on production plans for the coming month. The OPEC+ coalition has been returning 400,000 barrels per day to the market on a monthly basis. While it reverses the unprecedented production cuts it enacted in April 2020 in response to the pandemic’s impact on demand for petroleum products.

In addition to recent price movements, the group will assess supply and demand trends after the United States and other countries revealed plans to use the Strategic Petroleum Reserve last week. This was done in order to slow down the rapid growth in fuel prices. The US will release 50 million barrels from the Strategic Petroleum Reserve, according to the Biden administration.

Wall Street is split on what OPEC+ would disclose at its meeting on Thursday. “With the uncertainty around omicron, we expect OPEC to postpone its goal of increasing output in January.” Morgan Stanley told clients that it will similarly keep its quota flat.

OPEC+, on the other hand, is expected to “keep the line, and stick to its planned 400-k b/d quota rise,” according to Citi.

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