03 December 2021

Market Analysis

Black Friday crash, oversupply concerns: What to expect this week in oil trading

In what appears to be turning into a recurring phenomenon, the new coronavirus variant is once again triggering fresh bouts of volatility in the financial markets and oil prices in particular. 

Omicron, the latest coronavirus mutation, comes hot on the heels of a coordinated effort by leaders in the US, India, UK, South Korea and India to bring oil prices down by gradually releasing their emergency oil reserves - amounting to hundreds of millions of oil barrels. 

This didn’t sit right with the Organization of the Petroleum Exporting Countries and allies (OPEC+), who have been reluctant to further increase oil production as long as prices continued to gravitate toward the $80 mark. Currently, OPEC+ releases around 400,000 barrels per day.

As supply seems to be ramping up while demand is anticipated to stagnate amid travel and supply restrictions, the main concern is whether investors should expect an oil supply glut and the consequent crash in oil prices during the first quarter of 2022. 

More variants, more demand shocks

First Delta and now Omicron were behind the oil market’s biggest losses this year even though the recovery was quite swift in both instances. 

Back in August when the Delta variant was announced, Brent crude and the US West Texas Intermediate (WTI) dropped by 8% and 9% to reach multi-month lows near $65 and $62 respectively.

And Omicron fears unsurprisingly gripped investors in much the same way. The two global oil benchmarks lost more than 10% on Black Friday, 26 November 2021, as Brent crude and WTI oil revisited $72 and $67 before recovering some of their losses on Monday when the dust had settled.

Oil prices are now largely stable and trading in a tight range. Brent crude climbed back to $75.90 and WTI hovers near $71.50. However, uncertainty will remain on the horizon until the Omicron variant’s transmissibility and mortality have been properly assessed by the World Health Organization (WHO).

The week ahead

This week is shaping up to be rather intense as Omicron and its impact on the global growth outlook will more than likely dominate the headlines and trigger volatility across the commodity markets as well as commodity currencies. 

OPEC+ is also scheduled for a meeting to discuss output plans this Thursday, however, the recent downturn will likely force their hand to cut production even further, amid the threat to oil demand in the coming months.

The two main events on the economic calendar this week are Powell’s speech in Washington on Tuesday - who resumes his second term as Fed Chair - and Friday’s US jobs report.

Rising inflation continues to be a concern for both currency and commodity traders, and Powell and the NFP report may provide insights into the outlook and performance of the economy as a whole. 

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