Omicron Causes Weekly Loss For Crude, But Goldman Says Sell-Off Is "Overdone"

The bank warns that record demand and tight supply could cause oil prices to skyrocket: File Image/Pixabay

With omicron fears waxing and waning within the investment community since the strain was detected in South Africa, it came as no surprise that oil prices on Friday dropped  as well as posted a weekly decline, as traders viewed rising hospitalization rates in the U.K. and U.S. as a harbinger of demand impact.

West Texas Intermediate fell $1.52 to settle at $70.86 per barrel, while Brent fell $1.50 to $73.52; WTI posted a weekly decline of 1.1 percent compared to Brent, which fell 2.2 percent.

Pavel Molchanov, an analyst at Raymond James & Associates Inc., said, "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.

"Right now, Covid is the number one variable for demand on a daily basis."

Ole Hansen, head of commodity strategy at Saxo Bank, addressed other crude-related issues on Friday: "While Europe is dealing with a worsening energy crisis, milder than normal weather in Asia has led to a less demand for fuel products used in power generation and heating."

Friday's crude trading was also affected by the U.S. dollar rising in response to the Federal Reserve and other central banks taking the first steps to tighten monetary policy, in order to keep inflation in check.

As in past sessions, huge uncertainly remains over what the impact of omicron will be for oil, with the view of those who fear of significant demand destruction offset by those who foresee a strong market ahead, case in point: Goldman Sachs Group Inc. said recent crude sell-offs were overdone on unnecessary concerns about omicron-related restrictions, and that demand is at record levels.

Damien Courvalin, head of energy research, told media, "There's insufficient supply in the face of strong demand, [and] oil prices have to be higher to overcome the higher cost of capital to fund projects."

He added that demand for everything from gasoline, diesel and plastics is currently at a record level, with consumption expected to reach new highs in 2022 and 2023, and that oil prices could go as high as $110 per barrel if supply can't keep up and the market needs demand destruction in order to balance.