Oil Falls This Week as Omicron and Tightening Fed Sour Sentiment

Futures in New York fell as much as 3.4% on Friday to briefly trade below $70 a barrel. It ended the week losing over 1% as daily Covid-19 cases in the U.K. jumped to a record, while hospitalizations surged across the U.S. Prices also weakened after the U.S. dollar rose in response to impending steps by the Federal Reserve and other central banks to tame inflation. Brent crude closed the weekly broadly steady.

“We need to be ready for Covid headlines to continue driving the oil market on a day-to-day basis at least until the remainder of this winter,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. “Right now, Covid is the number one variable for demand on a daily basis.”

Signs are also emerging of softening oil demand in Asia, while the International Energy Agency said this week that the global market had returned to surplus as omicron impedes travel. The weakness is showing up in the market’s structure, with Brent flicking in and out of a bearish contango, which signals oversupply.

“Crude oil is struggling amid raised concerns about the fast-spreading omicron virus and its impact on global demand,” said Ole Sloth Hansen, head of commodities research at Saxo Bank A/S in Copenhagen. “Also, unseasonal warm weather in Asia is potentially softening demand for fuels toward heating and power generation.”

The seventh round of Iran nuclear talks concluded in Vienna and will resume soon. The European Union’s Envoy Enrique Mora said parties have reestablished common ground for negotiations but that they have weeks, not months, to revive the 2015 Iran deal.

This week has seen traders contend with conflicting signals on demand and supply. Those include the central banks’ moves, restrictions to limit the spread of omicron and declining inventories in the U.S. That has caused a generally risk-off attitude in oil markets, leading the aggregate volume of futures contracts to drop over the past two sessions. Looking ahead, some factors could counter downward pressures.

“We are keeping a close eye on movements in the U.S dollar and oil market volatility,” said Ryan Fitzmaurice, a commodities strategist at Rabobank.  “A move lower in either or both of these factors will likely lead to increased buying from money managers, driving Brent back towards the $75 mark.”