Monday, August 8, 2022

Omicron variant: Could be another good reason for OPEC to halt production?

During Black Friday last week, just as people were excited and cheering about holiday travel and retail shopping, a new variant emerged from South Africa bringing new level of fear into public sphere.  

On November 26th, the World Health Organization(WHO) designated a new variant originated from South Africa as Omicron variant, and raised concerns about the nature of this variant due to its abnormal high mutation compared with others. When the news came out, government worldwide took precaution and imposed travel restrictions on various African countries. Few days later, the WHO said the Omicron variant is a high concern because there are not enough evidences to suggest whether the variant is more infectious than others, or if existing vaccine will work against the new variant.

Omicron variant a huge blow to the oil market 

The uncertainty of Omicron sparked panic and fear among investors. Bond market, and equity market worldwide plunged during Black Friday. The oil market have witnessed the worst day since April 2020. Western Texas Intermediate (WTI) crude futures went down 13% for the day, closed below $70. 

The fear of renewed lockdown and travel restriction could potentially lead to a weaker 4th quarter for global oil demand growth. At the same time, crude price have already been trending down for some weeks from fear of additional supplies from joint release of oil reserve in US and other Asian countries.

Earlier last week, OPEC advisory panel warned the oil market would be oversupplied by 1.1 million barrels per day with the coordinate release of SPR reserve. It planed to also reassess the production increase set to begin on December’s meeting. Given additional demand weakness from Omicron, it is highly likely OPEC would pause production increase to balance out the market by next year.  

The variant might serve another great excuse for OPEC to pause production

Another reason given a pause of production lies in technical problems for members of OPEC group to bring idling capacity back online. According to Reuters report for the months of September and October, various African nations in the OPEC group, Angola, Nigeria, continued to pump under the quota. They suffer meaningful production losses from low investment in the industry and frequent maintenance activities.

Even for Saudi Arabia, there are number of factors likely to limit its production growth. Furthermore, the national oil corporation Aramco, dramatically reduced its Capex following the pandemic focused on cash return and dividend payments. Its production are also limited by its net zero climate change pledge, which forecast to grow only  500,000 barrels per day from its pre pandemic level by the year 2025, according to a spoken person from Aramco this summer.  

Russian oil producers have also resumed shutting down oil wells through the pandemic to bring back production. If production is to increase further next year, oil producers may need to drill new wells, potentially necessitating fresh money. According to Global Data analysts, Russia’s new oil and gas drilling discoveries fell to a five-year low last year.

Jiayang Shao
I am a political and financial news writer who focus on global events. One of my biggest interests is to look at how government policy, geopolitics, macroeconomics, and supply, demand influence the oil market.

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