Surge In Omicron Cases Spooks Oil Traders

U.S. West Texas Intermediate crude oil futures are edging lower on Friday, putting the market in a position to post a slightly lower close for the week. Although the market put in a mixed performance throughout the week, a bearish consensus seems to be developing as surging cases of the Omicron coronavirus variant raised fears that new curbs may lead to demand destruction.

This week’s inside trade on the chart suggests investor indecision and impending volatility. The indecision is being fueled by mixed outlooks for supply/demand and the lack of clarity from health officials on whether vaccines are effective against Omicron. The source of volatility could be greater curbs and restrictions designed to soften the impact of the virus, and thin trading conditions tied to the year-end holiday season.

Omicron Update

Since Omicron was discovered about three weeks ago, global health officials have offered various opinions about the vaccines’ effectiveness against it. They have, however, reached an agreement that they still don’t know enough about it to give a good opinion on its impact. Meanwhile, governments have reached their own conclusions about how to fight the spread. They have chosen to reimpose restrictions.

As of Friday, Reuters is reporting that in Denmark, South Africa, and Britain, the number of new Omicron cases has been doubling every two days. Denmark’s Prime Minister Mette Frederiksen said her government would propose new restrictions. This follows the U.K. that has had restrictions in place for over a week.

Meanwhile, in the United States, the rapid spread of the Omicron variant has led some companies to pause plans to get workers back into offices. This could lead to lower gasoline demand.

Traders Pricing in Lower Demand and Higher Supply

In another bearish indicator, in addition to pricing in the possibility of lower demand due to new economic restrictions in some countries, traders now have to deal with increased supply due to higher U.S. and OPEC+ output.

The International Energy Agency (IEA) on Tuesday said a surge in COVID-19 cases with the emergence of the Omicron variant will dent global demand for oil at the same time that crude output is set to increase, especially in the United States, with supply set to exceed demand through at least the end of next year.

US Fuel Demand Surges on Record Demand

Crude oil prices were poised to drop further earlier in the week until the government releases its weekly inventories report that showed an unexpected surge in fuel demand.

U.S. implied consumer petroleum demand surged to an all-time high last week on the back of holiday demand and travel – even as the Omicron variant of coronavirus threatens to dent oil consumption in coming months, Reuters reported.

Overall crude stockpiles fell due to rising exports, and inventories for gasoline and distillates were also down, the U.S. Energy Information Administration said Wednesday.

Product supplied by refineries, a proxy for demand, surged in the most recent week to 23.2 million barrels per day (bpd), due to gains in gasoline, diesel and other refined products. The less volatile four-week average was 21.3 million bpd, ahead of pre-pandemic levels, and the strongest in December since 2018.

We don’t expect this to turn into a trend especially if people decide to curtail their Christmas and New Year travel plans, and if companies delay the opening of offices.

Inventories Fall as Exports Jump on Year-End Tax Considerations

Crude inventories fell by 4.6 million barrels in the week to December 10 to 428.3 million barrels, more than double expectations in a Reuters poll for a 2.1 million-barrel drop.

U.S. gasoline stocks fell 719,000 barrels in the week, while distillate stockpiles fell by 2.9 million barrels.

This could also be a “one and done” event.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. However, momentum has been trending lower since the confirmation of the closing price reversal top from the week-ending October 29. 

A move through $60.21 will change the main trend to down. A trade through $80.72 will negate the closing price reversal top and signal a resumption of the uptrend.

The minor trend is down. The minor trend changed to down the week-ending November 19 when sellers took out the minor bottom at $75.17. The move confirmed the shift in momentum to down.

Retracement Level Analysis

The new minor range is $80.72 to $62.05. Its 50% to 61.8% retracement zone at $71.38 to $73.59 is the primary upside target. It is also controlling the near-term direction of the market. This zone stopped the rally at $72.82 the week-ending December 10 and again this week.

On the downside, potential support is a pair of 50% levels at $70.47 and $67.68.

The major support is a 50% level at $59.76 and the long-term retracement zone at $57.10 to $51.52.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending December 24 will be determined by trader reaction to $73.59 and $67.68. It’s a wide range, but we have to leave room for volatility that could lead to a choppy trade on both side of $71.38 and $70.47.  

More aggressive traders may want to use a move over $71.38 as a sign of strength and a move under $70.47 as an indicator of weakness.

Bullish Scenario

A sustained move over $73.59 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a possible surge into $80.72 over the near term.

Bearish Scenario

A sustained move under $67.68 will signal the presence of sellers. This could create the downside momentum needed to drive the market into the support at $62.05 to $59.76.

Short-Term Outlook

The Omicron coronavirus is causing uncertainty, and when there is uncertainty, investors tend to sell. This is also the reason for the choppy, two-sided trade. Additionally, during periods of uncertainty, traders lack the conviction to buy strength or sell weakness that tends to drive a trend.

Instead, they become more willing to sell resistance and buy support, holding the market in a range.

The World Health Organization (WHO) is the major source of uncertainty because, by its own admission, it just doesn’t know enough about Omicron to make a definitive prediction about its impact. This is creating uncertainty in the oil market because traders can’t hedge away a risk they know little about. So the best solution for traders has been to sell and keep their powder dry until there is more concrete news about the virus.

The WHO on Wednesday said preliminary evidence indicates vaccines may be less effective against infection and transmission linked to the Omicron coronavirus variant, which also carries a higher risk of reinfection.

But the WHO, in its weekly epidemiological update, also said that more data was needed to better understand the extent to which Omicron may evade immunity derived from either vaccines or previous infection.

“As a result of this, the overall risk related to the new variant of concern Omicron remains very high,” it said, echoing comments made by WHO officials at an online briefing on Tuesday.

These types of comments fuel uncertainty and are likely to continue to do so until the WHO makes a definitive statement about Omicron. Only then will traders have the confidence to act with clarity and conviction.