Oil Price Fundamental Weekly Forecast-- Heightened Volatility Puts New Pressure on OPEC+ to Act

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures struggled all week as rising cases of the Omicron coronavirus variation raised worries that new restrictions may hit fuel demand.

For bullish speculators, these battles are most likely to continue this week as Omicron continues to spread at a fast pace, developing concerns that federal governments' will enforce brand-new limitations to avoid medical facilities from being overwhelmed by new patients.

This is likely to result in demand destruction at a time when U.S. production is expected to increase. Merely stated, low demand, high supply is bearish so traders have to make position modifications by offering. This is likely to continue till rates hit a value zone or up until traders rate in damage expectations.

This wasn't the case at the start of the week when OPEC stayed upbeat on 2022 oil demand, even stating Omicron effect will be mild. However, by the end of the week, the price action showed traders were leaning more toward the projection from the International Energy Administration, which showed oil supply would top demand.

Recently, March WTI petroleum futures settled at $70.35, down $0.87 or -1.22% and March Brent petroleum completed at $73.52, down $1.39 or -1.89%. The United States Oil Fund ETF (USO) closed at $50.74, down $1.13 or -2.18%.

Will New Developments Force OPEC to Make Lower Modifications to Demand Projection?

Last Monday, OPEC raised its world oil demand projection for the very first quarter of 2022 and stayed with its timeline for a go back to pre-pandemic levels of oil usage, stating the Omicron coronavirus version would have a mild and brief effect.

In a monthly report, OPEC said it expects world oil demand to average 99.13 million barrels each day (bpd) in the very first quarter of 2022, up 1.11 million bpd from its forecast last month.

" Some of the healing previously expected in the 4th quarter of 2021 has been shifted to the very first quarter of 2022, followed by a more stable recovery throughout the second half of 2022," OPEC stated in the report.

" Moreover, the impact of the brand-new Omicron variation is forecasted to be mild and short-term, as the world becomes better equipped to manage COVID-19 and its related obstacles."

IEA Says Demand will Temporarily Slow, but Oversupply is New Concern

A surge in COVID-19 cases and the emergence of the Omicron variant will dent international demand for oil, the International Energy Agency (IEA) stated last Tuesday, however the more comprehensive picture is one of the increasing output set to top demand this month and skyrocket next year.

" The rise in new COVID-19 cases is expected to briefly slow, but not upend, the recovery in oil demand that is underway," the Paris-based IEA said in its monthly oil report.

" New containment determines put in place to halt the spread of the virus are likely to have a more muted impact of the economy versus previous COVID waves," it stated.

On the other hand, the United States will account for the single greatest increase in output for a second month running, the IEA said, as drilling gets there. Next year, Saudi Arabia and Russia might likewise set records for annual production if the OPEC+ group to which they both belong completely unwinds its agreed production curbs.

Weekly Outlook 

While brand-new Omicron cases overcome the global economy, we expect demand to take a hit. Most likely not as bad a formerly reported demand destruction, but enough for OPEC and its allies to take notice. When the group was formed, it cited rate stability as one of its requireds.

At its current conference in early December, OPEC+ reconfirmed its production adjustment plan and raised regular monthly total production by 400,000 barrels per day in January 2022. It likewise said that members agreed that the "conference will stay in session pending further advancements of the pandemic and continue to keep an eye on the market closely and make changes if needed."

If costs continue to decrease or volatility remains at heightened levels, I would not be shocked if OPEC+ hands down the expected 400,000 barrel daily increase at its January 4 conference.