Oil falls as tightening Fed, omicron sour sentiment

Bloomberg

Oil posted a weekly decline after a volatile few days that saw traders grow more concerned about the demand impact from the omicron variant and tighter monetary policy.
Futures in New York fell as much as 3.4% to briefly trade below $70 a barrel. It ended the week losing over 1% as daily Covid-19 cases in the UK jumped to a record, while hospitalisations surged across the US. Prices also weakened after the US dollar rose in response to impending steps by the Federal Reserve and other central banks to tame inflation. Brent crude closed the weekly broadly steady.
“We need to be ready for Covid-19 headlines to continue driving the oil market on a day-to-day basis at least until the remainder of this winter,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. “Right now, Covid-19 is the number one variable for demand on a daily basis.”
Signs are also emerging of softening oil demand in Asia, while the International Energy Agency (IEA) said this week that the global market had returned to surplus as omicron impedes travel. The weakness is showing up in the market’s structure, with Brent flicking in and out of a bearish contango, which signals oversupply.
“Crude oil is struggling amid raised concerns about the fast-spreading omicron virus and its impact on global demand,” said Ole Sloth Hansen, head of commodities research at Saxo Bank in Copenhagen.
This week has seen traders contend with conflicting signals on demand and supply. Those include the central banks’ moves, restrictions to limit the spread of omicron and declining inventories in the US. That has caused a generally risk-off attitude in oil markets, leading the aggregate volume of futures contracts to drop over the past two sessions. Looking ahead, some factors could counter downward pressures.
“We are keeping a close eye on movements in the US dollar and oil market volatility,” said Ryan Fitzmaurice, a commodities strategist at Rabobank. “A move lower in either or both of these factors will likely lead to increased buying from money managers, driving Brent back towards the $75 mark.”
Oil at $100 a barrel cannot be ruled out in 2023 as supply additions are expected to be too slow to keep up with record demand, according to Goldman Sachs.