OPEC Faces Omicron Uncertainty and Unruly Customers

One thing is certain when officials from OPEC, Russia and other oil-producing countries meet by teleconference on Thursday to decide how much oil to produce in January.

They’ll try to make sure that the sudden, sharp drop in oil prices last Friday – driven by reports of a more than 10 percent drop in a few hours, of a threatening new variant of Covid-19 – doesn’t turn into a rout.

“They’re going to want to put some kind of floor under the prices,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.

But the producer group known as OPEC Plus should also be concerned about the implications of last week’s announcement. Many other countries, including the United States and Chinawill release tens of millions of barrels of oil from its stockpiles in an attempt to drive down what the White House calls “pumping gas prices.”

Analysts said the move, which could bring oil surges to the market early next year, represents a kind of revolt by its customers against OPEC Plus.

“This undermines much of OPEC’s ability to manage markets,” said Raad Alkadiri, managing director of energy and climate at Eurasia Group, a political risk firm.

The key question at the meeting will be whether the group will move forward with its plan to increase output by 400,000 barrels per day in January as part of a gradual increase in supply as economies worldwide rebound after the pandemic lockdowns. But with the new Omicron variant and uncertainty about how to respond to President Biden’s release of oil reserves, there is no clear indication of which direction oil ministers will take.

Mr Bronze said oil officials, and especially those representing Saudi Arabia, which leads the group, fear what he calls “downside volatility” – the possibility that prices will continue to slide after Friday’s slump.

Analysts say oil officials will pay attention to the serious price drops that occurred in the first months of the pandemic in 2020. when some futures prices drop into negative territory and in 2014, After Saudi Arabia temporarily left from trying to manage the markets.

OPEC Plus has helped orchestrate a price increase of more than 50 percent this year through careful supply management, and its members won’t want those gains to slip out of their hands.

Mr Bronze and other analysts say these concerns could cause OPEC Plus to pause its program of increasing supply each month for a month or more. He may even decide to cut production, although this option seems unlikely.

As it’s still too early to know what impact the Omicron variant might have on the world economy, the easiest move may be to stick to the agreed plan and wait until the group’s next meeting in January.

Continuing the planned increase will likely ease the friction with the Biden administration, which regulates the release of oil stocks from the United States Strategic Petroleum Reserve, along with smaller moves by other major oil consumers.

In a note to clients, RBC Capital Markets analyst Helima Croft said this would protect White House content and prevent additional reserves from being released. The Biden administration has signaled that another reserve release is possible if this fails to meet its targets.

Combined with the impact of the new variant, prices have now dropped about 15 percent since the end of October, probably doing most of what the White House wanted.

Over time, strategic reserve releases may be a more alarming development for OPEC Plus than for Omicron. Previous coordinated releases were rare events in response to disruptions in supply. The latest came in 2011 when internal strife in Libya interrupted oil supplies from that country.

But this statement is actually a protest against what oil-consuming countries perceive as excessively rapid price increases, at least in part due to the artificial constraints on supply by the Organization of the Petroleum Exporting Countries and its allies.

“This is a complaint about prices ‘regulated’ by OPEC countries,” Edward L. Morse, Citigroup’s head of global commodities strategy, told customers in a video message.

It remains to be seen what OPEC can do about this development.

Mr Morse and others say, for example, as the world shifts from its dependence on oil to electric vehicles, movements that once seemed unusual may become more common – perhaps with new impetus gained by the recent climate summit in Glasgow.

Countries like Saudi Arabia and the United Arab Emirates need healthy oil revenues to finance the diversification of their economies from oil to other forms of energy, while high prices encourage oil diversion, weakening demand over time.

“OPEC and the Saudis were able to manipulate the market by relying on oil’s monopoly power over transportation,” said Jim Krane, an energy expert at Rice University’s Baker Institute. “We are now seeing substitutions popping up on the margins. Confidence in the longevity of oil is waning.”