Energy. Omicron shadow looms over oil, gas prices

Omicron may end up deciding how much you will spend on your auto and cooking fuel. Not only has it put health experts and bodies like the WHO in a cautious mode as they are working on how dangerous or destructive this virus is, it has also left entities such as the Organization of the Petroleum Exporting Countries (OPEC) confused.

It is going to be a critical 10 days for the market till a clarity emerges regarding the latest virus variant, as experts tracking the sector are of the view that the situation is still “evolving” and a lot will depend on the way Europe and the US shape up over the next two weeks. “Commodity prices, including that of oil and natural gas, are likely to firm up on the back of an anticipated peak demand requirement in winter and low inventory levels. However, the exact impact on prices can only be determined once there is a prognosis on how dangerous the Omicron variant turns out to be,” said an expert.

Also see: US could adjust timing of oil stockpile release if prices fall

The recent emergence of the Omicron variant has been posing a threat sparking a risk-off trade in many markets, including commodities. In effect, the Brent crude had fallen from levels of $80 a barrel as of November 25 to $70 a barrel at present. According to a recent report by Refinitiv, an LSEG business, oil prices have largely stayed above $80/bbl until the recent fall, buoyed by bullish sentiment over a worsening power crisis towards the peak winter demand season and the perceived reluctance of OPEC+ to raise output amid recovering demand, as vaccinations increase, and more countries open up.

Price stability: Another global lockdown?

“We believe the market was overbought when prices soared above $80/bbl, driven largely by sentiment, and the current $10/bbl fall is a reflection of that. Where prices stabilise will depend on the prognosis of how dangerous the Omicron variant turns out to be. At this point, we simply do not know – it could lead to another round of global lockdowns, or it could be so mild that no further measures are needed,” said Yaw Yan Chong, Director, Refinitiv Oil Research (Asia), in the report.

According to Prashant Vashisht, Vice President – Corporate Ratings, ICRA, prior to this new variant, the supply (of crude oil) was short of demand because of the graded increase in supply by OPEC+ as against demand, which has been higher than expectation.

“In case there is a severe winter, and gas prices remain high, then crude prices are expected to remain firm. Gas prices have not shown that kind of a decline which has been shown by crude. Crude prices have certainly taken a knock but gas being a more concentrated market is somewhat holding out right now. In case this trajectory continues and if crude prices continue to decline due to a lockdown or anything, then again the shift from gas to oil will be incentivised. But gas prices don’t seem like they would be coming down in a hurry,” he said.

Supply side factors

On the supply side, given that there has been market share shift during the pandemic and that oil is in a precarious position as there is expected to be a global plateauing of crude demand over the next decade with proliferation of electric vehicles, the quest around OPEC countries to have maximum market share will be very high and therefore, it is believed that market share linked rub-offs may be high globally.

According to Hetal Gandhi, Director, Crisil Research, as far as India is concerned, there is less pain in oil prices, however, gas prices may remain at elevated levels. “Given that 50 per cent of the population is vaccinated and a large portion of the unplanned expenditure has already been incurred, we believe the government will now start lowering taxes on fuel. On the retail side of crude there is not much for India to worry at the moment but on the gas side, we will continue to face a ripple effect. We have already seen CNG prices going up and natural gas price to fertiliser sector going up. The revised prices are over 50 per cent higher so during the first half of the next year, we will continue to feel the pain of that, resulting in higher cost for corporate who are using gas like fertilisers or leading ceramic players, and also for users of CNG on transportation side. We expect some moderation only in second half,” she said.