Oil Plunges Over 5% As Demand Pessimism Kicks Into High Gear

Meanwhile, strong economic news across Asia is ignored: file image/pixabay

The U.S. Federal Reserve chair stating on Tuesday that a strong American economy may justify ending the central bank’s asset purchases sooner than anticipated triggered  yet more worries about demand impact, causing oil to slide by over 5 percent.

The theory was that ending asset purchases earlier in 2022 could increase interest rates, and as Rebecca Babin, senior energy trader at CIBC Private Wealth Management, explained, “That ties back to crude oil because if you start to pump the brakes on economic growth, you start to see impact on demand.”

West Texas Intermediate for January delivery plummeted $3.77 to settle at $66.18 per barrel, while Brent for January settlement dropped $2.87 to settle at $70.57 per barrel.

RBC Capital Markets noted that ending asset purchases, combined with renewed Covid fears due to the omicron variant, raised chances that the Organization of Petroleum Exporting Countries (OPEC) would put on hold plans to add 400,000 barrels per day (bpd) to supply in January.

Yet more storm clouds for jittery traders came in the form of talks in Vienna this week designed to revive Iran’s 2015 nuclear deal, which if successful could contribute more oil to the global market – something that just prior to omicron would have been hailed by some as helping to alleviate a strained global inventory.

All but ignored on Tuesday was a host of positive news, first and foremost being that if omicron proves to be more contagious and far less lethal as many scientists suspect, this could be the end of the pandemic.

Also, data from Asia showed improvements in leading economies, Japan’s factory output rose, and China’s manufacturing purchasing managers index returned to expansion.

The main influence for crude trading for the next few weeks is undoubtedly omicron, with analysts as usual voicing their pessimism, case in point: Louise Dickson, senior oil markets analyst at Rystad Energy, on Tuesday warned that "Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022 as governments prioritize health safety over reopening plans, of which there is already tell tale evidence, from Australia delaying its reopening to Japan banning foreign visitors."

Reuters, while equally downbeat about omicron, at least put recent crude losses in perspective on Tuesday by stating that “Oil prices are now down 15 percent for the month which, like travel stocks, is also the worst month since the Covid rout; it does, however, come after a more than 400 percent surge in prices since that trough.”