Hindsight is 20/20: Why OPEC’s steady course was right on the money
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Last weekend proved that there truly never is a dull moment in the oil markets. Oil prices temporarily plunged by more than 10 percent, for both Brent and the West Texas Intermediate, on the discovery of yet another variant of the coronavirus, labeled omicron. This has proven OPEC+ correct in its recent decisions.
Over the past few months OPEC+ has come under global scrutiny for steadfastly resisting pressure from the US and other oil-consuming nations to increase its schedule of releasing an additional 400,000 barrels per day on a monthly basis between August 2021 and September 2022.
Earlier in November, concerns from leading consuming nations about rising oil prices and inflationary pressures led the US, China, India, South Korea and Japan to release a combined total of around 70 million barrels a day of their strategic petroleum reserves.
In a sign of just how uncertain market developments are, the speculation about the imminent release of these reserves caused the price of oil to drop by as much as 8 percent in the weeks before the action was taken. The actual release corrected the price by about 3 percent to the upside, in line with the old market truth of “buy on the rumor sell on the fact.”
The reasoning behind OPEC+ refusing to augment production beyond its previously scheduled volumes was that while the global economy has rebounded, the virus is still dominating economic activity in various geographies and it is as yet uncertain how it will develop.
Furthermore, OPEC foresaw the market swinging from deficit to surplus for the whole of 2022. While the Organization for Economic Co-operation and Development’s International Energy Agency and the US Energy Information Administration also foresaw this balance swing, they forecast much lower excess supply for a shorter duration.
What happened on Friday, Nov. 26 validated OPEC’s cautious approach: The omicron variant of the COVID-19 rattled all markets, including the oil markets. As noted, both Brent and WTI were temporarily down by more than 10 percent as the new coronavirus variant prompted the closure of air routes between several nations in southern Africa and nations in Asia, Europe and North America.
True, part of the implosion of the oil price was the result of trading being thin the day after the US Thanksgiving holiday, when junior traders were manning the desks, resulting in algorithms and derivatives/options ruling the market.
It is true, also, that markets always overshoot and undershoot, which is why we have to take last Friday’s market swings with a grain of salt. Markets rebounded steadily after the first shock but on Tuesday there was another slide in prices. By 8 p.m. central European time, WTI had lost close to 5.5 percent and was trading at $67.14 a barrel, while Brent slid by about 4 percent, tumbling to $70.57 a barrel, making November the worst month for oil prices since April last year.
The latest developments will affect the assessment of ministers during the Joint Ministerial Monitoring Committee and the full OPEC+ ministerial meetings on Thursday. Ministers will have to take into consideration several factors.
While the decisions to close borders in response to the omicron variant were initially hesitant and limited, an increasing number of countries, including Japan, are not only restricting travel from countries in southern Africa, they are closing their borders, period. Others are imposing quarantines on travelers from countries where omicron cases have been found.
We might be some way from borders closing again on a global scale but restrictions are certainly being reinforced, which is a bad sign for the travel and leisure industry, which is a major contributor to the health of oil markets. The partial lockdowns introduced by several European countries in an attempt to break the latest wave of the coronavirus also do little to inspire confidence.
At the same time the US has not taken off the table continued management of strategic petroleum reserves. Amos Hochstein, the American special envoy and coordinator for international energy affairs, told CNBC on Tuesday that the US does not rule out the future release of reserves if it is felt this is warranted — particularly as the release of 30 million barrels has been granted as an exchange, meaning that the companies that avail themselves of the instrument need to return what they take to the reserves according to an agreed schedule.
On top of all this we have other geoeconomic developments, such as the resumption of the P5+1 negotiations aimed at reviving the Joint Comprehensive Plan of Action, also known as the Iran nuclear deal. Most analysts do not expect great strides to be made on this front but the negotiations have the potential for further barrels to be released on oil markets at some point down the road.
All in all, the global macroeconomic situation remains tenuous as long as the virus continues to throw curveballs. While the degree of a supply overhang at the beginning of next year might vary, the fact that markets will be oversupplied at the start of the year does not.
Taking all of the above into consideration proves once more that the prudent stewardship of OPEC+ and its incremental increase of supply over the past few months was more than justified.
In hindsight, the OPEC+ motto of “steady does it” has served it well. However, the group might choose to react to the past month’s developments by weaning off the scheduled 400,000 barrel per day increase in production, depending on how the facts present themselves on Thursday.
November’s events have shown that the situation of global markets vis-a-vis the virus is tenuous, to say the least. We have to expect considerable volatility in the near term until markets have come to grips with the impact of the omicron variant on oil markets and the global economy.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
