It’s a case of new year, same old OPEC+. The producer alliance convened yesterday for their latest monthly meeting and agreed to stick with their planned 400,000 bpd output increase for February. The move was widely expected. After all, prior to the meeting, OPEC+ hinted that Omicron would have only a small and temporary impact on demand. All the while, the decision to stay the course with easing supply curbs was also made easier by production issues afflicting some of the cartel’s members, most notably Libya.

The OPEC+ decision has added to the general optimism surrounding the severity and impact of the Omicron variant. Small wonder, then, that it gave oil prices a lift. Brent settled at $80/bbl for the first time in six weeks. Wall Street joined oil futures higher with the Dow Jones index bouncing to a second consecutive record closing high. Traders are banking on a steady economic recovery despite the surge in Covid infections caused by the Omicron variant. The US reported a global record of over 1 million daily Covid cases while UK cases topped 200,000 for the first time. Crucially, though, no new curbs have been forthcoming, at least for the time being.

Elsewhere, the European energy crisis rumbles on with no end in sight. The primary reason for the crisis remains lower than anticipated pipeline gas flows to Europe from Russia. Russia’s Gazprom cut its daily volume of gas transit via Ukraine to Europe to the lowest level since January 2020, the head of the Ukrainian gas transmission system’s operator said yesterday. At the same time, Russian pipeline flows through Yamal to Germany remained at zero. The upshot is that tight inventories in Europe are expected to tighten further.

Returning to oil, attention is turning to the state of US inventories. Overnight, API data showed crude stocks extended their downward trajectory last week with a forecast-beating drop of 6.4 million bbls. Meanwhile, product stockpiles continued to swell with gasoline and distillate fuel stocks surging by 7.1 million bbls and 4.4 million bbls, respectively.

Not yet out of the woods

The new year has gotten off to a good start on oil markets. This comes on the heels of a blockbuster performance in 2021 in which Brent and WTI scored their biggest yearly jump since 2009. Major forecasters expect global oil demand to hit a record level this year amid a continued recovery from the Covid-19 pandemic. In 2022, global oil consumption will gain 3.3 mbpd year-on-year and reach 99.5 mbpd, finally surpassing pre-pandemic levels, according to IEA figures. But there is no guarantee that this recovery will be smooth sailing.

While lockdowns remain limited the threat has not completely been removed. The new Omicron variant of coronavirus is spreading faster, causing some nations to tighten restrictions. Recent travel restrictions in the wake of the Omicron variant will likely stall the recovery in jet fuel demand until the fourth quarter of this year, according to GlobalData. If curbs intensify, it would further dent demand in jet fuel. Global demand for oil products other than jet fuel has returned to pre-crisis levels. The lagging recovery of aviation fuel demand is holding back crude demand and therefore remains a key factor in the demand equation.

Another source of concern for demand is China. Last year, China recorded its first y-o-y drop in crude oil imports in over two decades. And it is unlikely to return to record 2020 levels as Beijing keeps pressure on teapots following investigations into tax avoidance and environmental offences. Sure enough, China recently issued a new batch of oil import quotas for independent refiners for 2022 that showed total annual allowances were lower than last year. Needless to say, this has sent the alarm bells ringing. What’s more, China’s “zero Covid” approach is likely to continue for the foreseeable future. This brings with it the risk of new travel restrictions.

For all this alarmism, downside risks on the demand side of the oil coin have so far been ignored. The same can also be said about the fact that the global balance has shifted into oversupply for the first time in 18 months. According to OPEC, the supply surplus on the oil market in 1Q22 will stand at 1.4 mbpd. This margin is set to widen until the start of the peak demand season in June. Such a bearish market fundamentals will rule out the possibility of significantly higher oil prices. Indeed, oil analysts surveyed by Reuters lowered their price forecasts for 2022. Brent crude is now seen averaging $73.57/bbl this year, about 2% lower than a previous consensus and the first downgrade since the August poll. Better said, oil prices are unlikely to remain elevated at current levels given the backdrop of uncertain demand in the coming months.