By Daniel Graeber CORRESPONDENT
It’s all about omicron in oil markets this week.
Crude fell nearly 4 percent Monday — the deepest dive of the month — as the highly contagious variant spread rapidly around the world, threatening to undercut the energy demand that fueled a rally for much of the year. Oil, which just over a month ago was flirting with $83 a barrel, settled Monday at $68.23, down $2.63 a barrel.
The selloff followed last week’s decline of about 1 percent.
Ole Hanson, the head of commodity strategy at Danish investment firm Saxo Bank, said it was becoming evident that jump in COVID-19 cases caused by omicron is having an impact on the economy and energy demand. Denmark, for example, has one of the highest vaccination rates in the world but is heading into a partial lockdown, he said.
“Until we know more and hopefully get confirmation of its limited impact, the market will worry about the demand outlook,” he said. “But longer-term expectations for higher prices are clearly on hold for now.”
New York on Friday recorded the highest number of positive cases since the pandemic began. Paris on Saturday opted to cancel New Year celebrations, and the World Health Organization said the number of new cases of COVID-19 is doubling in 1.5 to 3 days in areas with community transmission.
Petroleum demand has held up in the U.S. market, but that strength likely won’t last, analysts said. The Energy Department said last week that it expected supplies to exceed demand create a petroleum surplus.
The futures curve for Brent crude, the global benchmark for oil, shifted into backwardation last week. Backwardation is a situation in which future prices are lower than current levels — pointing to a coming glut.
Oil’s slide could provide some relief to consumers, who have been paying the highest gasoline prices in years, and ease inflation pressures. Higher energy costs have been a main contributor to rapidly rising consumer prices.
Over the past week, gasoline prices fell 4 cents a gallon in Houston to average $2.80 a gallon. Local gas prices are down 4 cents a gallon over the last month.
Nationally, gasoline fell 3 cents to an average $3.30 a gallon, down 11 cents from a month ago.
“The decline in gas prices will likely continue until new COVID cases slow down,” said Patrick DeHaan, head of petroleum analysis for GasBuddy.
How OPEC and its allies might react to falling demand and prices remains a wild card. Caroline Bain, chief commodities economist at London-based Capital Economics, said that she’s curious to see whether OPEC+ will act to stop sliding prices by halting its modest monthly production increases or even cutting output.
OPEC at its meeting in early December stuck to its plan to increase output by 400,000 barrels a month.
“We have to remember that OPEC+ left its last meeting ‘in session,’” she said. “It could change its output policy before its next meeting on Jan. 4 if it thinks omicron is now posing a risk to demand.”
This report contains material from Bloomberg News.