Dark shadow of Omicron looms over Oil markets

A few weeks ago, $100 oil was on the agenda with the recovery in global demand in full swing, even if the lockdowns in Europe were a warning sign.

Overnight, a surprise shift by the Fed sees many traders now expecting a faster taper than originally expected and rate hikes to potentially follow in the spring of next year. Soaring inflation, aided by rampant oil prices, is set to accelerate US policy tightening, even as the risk of the new Covid variant lingers.

Oil struggles amidst the volatility

Oil has endured a wild ride recently, closing out its worst month in November since March 2020. Risky assets are also bumpy with G7 FX volatility currently making new highs for the year. The widely watched Vix index, Wall Street’s fear gauge and an indicator of price moves on the S&P500 over the next month, notched its biggest monthly surge since February last year.

OPEC+ decisions in the middle of huge uncertainty

In this precarious environment, OPEC+ delayed its Joint Ministerial Monitoring Committee to later in the week in the hope that more information was forthcoming about the Omicron variant. The cartel has already agreed at its last meeting to increase output by 400k barrels per day in December, so any decision made this week will likely take effect in January production levels.

The latest Covid developments will make for an interesting meeting for ministers. Of course, oil prices were being eagerly watched by major oil consumers already, as high prices were pushing inflation measures up to multi-decade highs. After the slightly underwhelming coordinated strategic reserves releases by several countries including the US, China and India, there is now much speculation about what the cartel will do. The group has consistently taken a cautious approach since the initial outbreak of the pandemic, and many believe there may be a pause in current supply increases with so much uncertainty around.

The threat to oil demand from travel bans and localised restrictions is genuine. Oil experts suggest that this could result in the loss of 3 million barrels a day of demand which is about 3% of the global total, in the first quarter of next year.

Bulls desperately clinging to key technical levels

Friday’s plunge in prices smashed through several Fibonacci retracement levels, as well as the 100-day simple moving average. Brent finally settled over 11% lower on the day around the important 200-day moving average and long-term trendline support from the April lows.

While the start of the week kicked off with a jump close to the 100-day moving average at $76.30, yesterday again saw fear creep in with oil posting a new low at $67.42. Prices are bouncing again today but the zone holding the long-term trendline and 200-day moving average will be key for direction going forward.

Written on 01/12/2021 by Lukman Otunuga, Senior Research Analyst at FXTM

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