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OPEC gives itself room on Omicron

Edward Bell - Senior Director, Market Economics
Published Date: 06 December 2021


OPEC+ chose to maintain its planned 400k b/d production increase for January 20222 at its early December meeting even as oil markets had been rocked by the threat of the Omicron variant of Covid-19. The move took markets somewhat by surprise given that comments from OPEC+ ministers in recent weeks had seemed to be in favour of keeping output steady or even cutting back in response to a planned release of strategic petroleum reserves from the US, China, Japan and a few other large consuming nations.

OPEC+ did, however, give themselves room to adjust plans quickly, saying that the “meeting shall remain in session pending further developments of the pandemic,” an oblique reference to the impact of the Omicron variant. Given that this new variant has been detected only recently and its full public health impacts are uncertain, it is premature to give a definitive assessment of how it will impact oil demand. It is wholly likely to be negative but the scale of demand affected is unclear.

We do not expect at this stage that economies like the US, UK or major European markets to respond to the Omicron variant with a full lockdown, similar to what the global economy experienced in Q2 2020. But at the margin, the threat of this new variant will likely deter some travel—particularly over the holiday period at the end of the year—and could encourage more remote working once again. Relatively high vaccination rates should also help to buffer these markets from some of the effects of Omicron, provided that its vaccine evasion is limited.

There is likely far more downside oil demand risk in emerging markets, however, where vaccine distribution has been lower and where some governments—China in particular—have taken a zero-tolerance policy toward Covid-19 outbreaks. The threat posed by Omicron thus will likely exacerbate supply chain issues in industry hubs in Asia, limiting industrial demand for fuel whether for manufacturing or shipping.

Our expectation for oil prices in Q1 2022 is for Brent futures to record an average of USD 75/b, supported by a steady pace of supply increases from OPEC+ and still robust demand growth, if at a slower pace that what we’ve witnessed in much of 2021. We believe that view still holds for now, the risk from Omicron notwithstanding, and thus maintain our price targets for next year at USD 68/b for Brent and USD 67/b for WTI.

Should Omicron prove to be a far more serious threat to public health and governments respond with more mobility restrictions then there are considerable downside risks to oil prices. But by taking a flexible and responsive approach, OPEC+ producers could help to set a floor under any collapse by cutting production.