Oil Vs Omicron

Any change in the oil market sends percussions to the whole economy. Oil prices respond quickly to changes in the demand and supply, exogenous shocks, alternative energy sources, the movement of the US dollar, and market speculations. The pandemic has enticed a dual supply and demand shock in the industry as restrictive policies were imposed for containment measures. Due to the halt in global economic activities, the annual world supply of oil decreased by around 7% during 2019-2020 compared to an increase of supply during 2018-2019 of 0.04 %, and the annual world demand decreased by around 8.6 % during 2019-2020 compared to a decrease of 0.6% in 2018-2019, as seen in the below graph. That decline was evident in the first 2 quarters in 2020 driven by the exceptional weather and Covid‑19 outbreak.

 Source: Oil Information. International Energy Agency (2021).

Furthermore, the global demand for natural gas fell significantly by 75 bcm, equivalent to a 1.9 % y-oy decrease in 2020, representing the highest recorded drop in gas since the financial crisis in 2008. From the supply side of natural gas, global producers have also decreased their production. The OECD America and OECD Europe have cut their production by 26.1 bcm in 2020, and the US has cut production by 13.5 bcm. Meanwhile, other countries; such as OPEC, OECD Asia, and Oceania have increased their production aiming to balance the forces of supply and demand. The aggregate decrease of global demand and supply for Natural Gas during 2020 is shown in the below figure. 

Source: Organization of Petroleum Exporting Countries (OPEC) Data

As economic activities are untethering, global demand and supply are recovering. Demand is 5.65 mb/d higher than the previous year reaching the pre-pandemic levels. However, the magnitude of increase in demand offsets the magnitude of increase in global supply which recorded 0.76 mb/d only. One reason for that gap is the Ida hurricane in the Gulf of Mexico that occurred in August 2021 that has caused turmoil in the industry’s supply pressuring the industry furtherly. The Bureau of Safety and Environmental Enforcement stated that Ida decreased 59% of the Gulf’s oil and 49% of natural gas supply, and the overall loss has caused a loss of 30.1 million barrels which is considered the worst hit in a decade.

The associated downsides of the outbreak and the Ida hurricane caused surging prices of natural gas and coal, compelling the economy to switch to oil, increasing the oil demand further by .5 mb/d. Natural Gas prices have peaked showing an upward trend in aggregate during 2020-2021, in which the prices reached the highest averages in the past 5 years, as seen in the below graph. Also, the shortage in natural gas, especially, in Europe contributed to the increase in natural gas which further burdened the demand for oil.

Therefore, the differential between demand and supply, along with the decrease of the supply of natural gas caused the price of energy to increase by 30 % during the period 2020-2021, in which the average price of WTI in Q3 reached $70.23 which is considered the highest average per quarter since 2018.

The increase in oil prices affects the consumer price index, as it increases the price of energy components; thus, causing cost-push inflationary pressures. The US consumer price Inflation rate in 2021 rose to an unprecedented level of 6.2%, as seen in the below graph.  These fluctuations in the oil price levels create uncertain waves for investors.

Source: Federal Reserve Bank of St. Louis Economic Data (2021).

Governments are adopting different strategies to combat the increase in oil prices. The International Energy Agency forecasts further growth in the demand for oil during the winter in tandem with the restrained oil production. Therefore, in concert with Japan, South Korea, and the UK, the US urges a quick-upward adjustment of supply to resist the pressure of increased prices by announcing the release of crude oil from their Strategic Petroleum Reserves. While OPEC, the main players in the crude oil industry who account for a third of world oil production, agreed to adopt a slower monthly upward adjustment of its production level by an increase of 0.4 mb/d during December, and they have released 540 thousand barrels per day less than agreed last month.

The table below shows the OPEC forecast for 2022, confirming the IEA’s forecast of increased demand.  The slow increase in supply results from the fact that some OPEC countries are already producing at full capacity, as well as OPEC believes, as United Arab Emirates Energy Minister Suhail Al-Mazrouei stated in an interview, that 0.4 mb/d increase can steer an excess supply in Q1 22 causing more turbulence in the market. But to avoid any future shortages as demand increases for recovery, the OPEC group has decided to increase the supply of oil by 400 thousand barrels per day in its latest meeting on December 2^nd, 2021.

Table 1 OPEC (November 2021). Oil Market Report

The next moves are anticipated as the Omicron variant spreads globally, and more restrictive methods are being imposed. Will other countries impose full lockdown for the unvaccinated as Germany did on the 2^nd of December or flight bans will be sufficient, a question that still remains until the mixed signals regarding the new variant fade.

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