How should the OPEC+ decision to stick to the old plan and increase oil production by 400k, despite the panic on financial markets over the new COVID-19 strain, be perceived? Should it be taken as a victory for the White House, which has repeatedly urged the Alliance to ramp up production and thereby not impede the recovery of the US and global economies, or as an assurance by Saudi Arabia, Russia and other allies that Omicron is not as dangerous as it might at first seem? Based on the reaction of Brent and WTI, investors are leaning towards the second option.
Increased supply is theoretically a bearish factor for oil. In practice, however, the conditions in which the market operates have to be taken into account. OPEC+ is seen by investors as almost like the Fed, which can either calm or worry by its actions. So, if the Alliance is calm about the new COVID-19 strain spreading around the world, there is no need to panic. Perhaps Omicron is not as dangerous as the Delta strain. The OPEC+ reassurance had an impact on the markets, which started buying oil. As a result, the North Sea grades jumped by 13.5% from their December bottom.
Fans of the physical asset did not have much faith in the further development of the correction either. Capital inflows into the 13 largest oil-oriented ETFs amounted to $500m in the week to November 30. This was the highest since May 2020. The US Oil Fund, the largest exchange-traded product on the market, recorded a capital inflow of $236m.
Capital flows into oil-focused ETFs
News that Chinese imports of oil rose to a three-month high in November and that negotiations between the West and Iran over the latter's nuclear program have hit a roadblock is supporting the bulls on Brent and WTI. Germany urged Tehran to make realistic proposals. The discussion is likely to continue, but the fact that Iranian oil will arrive on the market later than expected is positive for buyers of crude.
In my view, a 20% drop in major futures quotes from the highs of 2021 looks excessive. It is most likely a mass closing of speculative long positions amid fears triggered by Omicron. The case of countries going into lockdowns in 2020 because of a pandemic and the global economy plunging into recession is still fresh in the minds of investors. Nevertheless, it should be understood that the situation is unlikely to repeat itself. Humanity has adapted to COVID-19 and restrictions have become spotty, so we should not expect a reduction of 20% in global demand for oil as it was last year.
Technically, the inability of the bears to keep Brent below the trend line of the Opening Stage of the bump and run reversal pattern is a sign of their weakness. A rebound in the North Sea crude above $75-75.5/bbl would signal the exhaustion of the correctional movement and become a reason to form longs.
Brent, daily chart