Someone pointed out that if you jumble the letters in Omicron, it spells moronic; which in part explains some of the crazy moves in oil, says Phil Flynn of the PRICE Futures Group.
The perfect combination of a lightened holiday trade, along with fearful headlines surrounding this Omicron variant, has caused oil to have the worst month of the year as fear has overtaken reality. Of course, for oil, we have seen this story before, and we all know that fear is worse than reality. Oil tanked overnight but bounced from around the 200-day moving average, which seems to be the last line of defense for oil bulls. If oil can reverse and close higher, technically we should have hit bottom; but in a fear-based post-holiday trade, do technical numbers matter?
Even though reports say that this variant is very mild, it is what we do not know that is scaring the market. Reuters reported that oil prices tumbled more than 3% on Tuesday after Moderna's CEO cast doubt on the efficacy of Covid-19 vaccines against the Omicron coronavirus variant, spooking financial markets and adding to worries about oil demand. The head of drugmaker Moderna told the Financial Times that Covid-19 vaccines are unlikely to be as effective against the Omicron variant of the coronavirus as they have been against the Delta variant.
Maybe actual fundamental numbers could give the oil trade a wake-up call. Oil supply in the US should fall maybe as much as four million barrels this week, and if that happens, maybe some oil prices might regain their senses. The selloff also is giving OPEC+ cover to delay its production increase. The Opec meeting begins December 1, the JMMC is to meet December 2, and the official decision should come around 14:00 CET time.
The Biden Administration says that despite the Omicron virus, they still are planning on releasing oil from the reserve, and threaten that they will do it again if need be. Yet the more they do that, the less effective it will be as a tool.
The size of the US Strategic Petroleum Reserve—that is now being used as a tool by the Biden Administration—will be cut in half by 2032, which will make it an even less effective tool to influence prices than it already is. The Energy Information Administration reported that on Tuesday, November 23, the White House announced plans to make 50 million barrels of crude oil available to the market through a combination of exchanges and accelerating previously announced sales.
With these sales and several other legislated drawdowns, SPR inventories could decline from 618 million barrels (as of October 1, 2021) to about 314 million barrels by the start of the 2032 fiscal year, the lowest level since March 1983. The Infrastructure Investment and Jobs Act, passed earlier this month, includes a provision to draw down 87.6 million barrels of crude oil from the US Strategic Petroleum Reserve (SPR) in fiscal years (FY) 2028 through 2031. The SPR was established in the 1970s to alleviate the effects of unexpected oil supply reductions. The reserve was designed to hold up to 714 million barrels of crude oil across four storage sites along the Gulf of Mexico, where much of the US petroleum refining capacity is located.
Gasoline hedgers and heating fuel hedgers should look at the break to hedge. If Omicron does not shut down the entire economy, then supply will be short. We are looking for product draws in tonight’s American Petroleum Institute report.
So much for those polar vortex fears, December is coming in warmer than normal. In Europe, tensions with Russia could keep supply sketchy and give the market at least some support.
Learn more about Phil Flynn by visiting Price Futures Group.