The Omicron scare has rattled markets badly this week.
Unsurprisingly, the oil market has taken the hardest hit. If global travel becomes harder – and it is, with various governments reintroducing tougher restrictions after a brief period of loosening – then of course that’s going to hit oil demand.
But what about the longer run? After all, that’s what most of us as investors should care about.
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Well, the longer run still looks rather more conducive to higher oil prices.
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The oil price has crashed in two weeks
It’s been a tough few weeks for oil. First we had US president Joe Biden co-ordinating a release of oil from America’s strategic reserve with other partners around the globe. The idea behind this was to provide some relief at the petrol pump in the short-term and prop up his ratings.
It might well do this – no one likes higher petrol prices, they are the most visible indicator of consumer price inflation and the one most likely to contribute to social unrest. So staying on top of it is always a priority for most governments around the world.
But of course, breaking into your emergency stash today simply means you’ll need more oil tomorrow to stock it back up.
Secondly, we had the Omicron news. That really battered oil alongside the leisure sector and travel industry. As Dominic suggested yesterday, it increasingly looks like this is a squall for wider markets rather than “the big one”.
It’s also true that there are general mutterings among early reports that Omicron might be virulent but milder, and therefore potentially even helpful in terms of spreading immunity more widely. That’s a thesis which some JP Morgan analysts are suggesting could actually accelerate the end of the pandemic and be good news for re-opening.
However, none of that is clear quite yet, and, what with the Federal Reserve talking a more hawkish game recently too, fears that the recovery could suddenly grind to a halt have definitely grown, and that’s been bad for oil.
In all, these two factors contributed to oil sliding from above $80 a barrel just a couple of weeks ago to below $70 at one point yesterday.
Finally, oil cartel Opec+ hasn’t followed through on threats to adjust its own production to account for the strategic reserves releases. In its latest meeting, held yesterday, it went ahead with plans to produce more barrels from January.
However, this hasn’t hammered the market, because in an unusual move, it also stated that it is keeping its options open to making immediate shifts before the next meeting in January if necessary (that’s a bit like the Fed saying it might change interest rates between meetings).
In fact, oil rebounded from its $67-ish low yesterday partly as a result of this bet-hedging by Opec+.
Why there’s life left in oil demand yet
So what’s interesting is that this week, despite the plunge, a few analysts have been making very bullish noises.
I’ve seen at least two forecasts for Brent to hit $150 a barrel – one from JP Morgan and another from Jefferies.
(Big blowout forecasts are often a reliable sign of a top in the oil market. But these ones aren’t quite punchy enough for me to put them in that category. The ante was upped to $200 in the last oil boom so I’m looking for someone to suggest $250 or $300 before we top out this time round.)
The thesis is extremely simple; Christopher Wood of investment bank Jefferies sums it up on CNBC: “The issue for me is not the oil price, the issue is the pandemic. The oil price is going to go higher in a fully reopened world because nobody’s investing in oil but the world still consumes fossil fuels.”
I don’t actually have a great deal to add to that, but for some colour, let’s turn to JPMorgan which reckons that “capacity shocks” could see oil hit $125 a barrel next year, and $150 in 2023.
What’s interesting is that JPMorgan actually thinks that a chunk of this problem is about underinvestment on the behalf of Opec producers. The analysts reckon Opec’s spare capacity is a lot tighter than the consensus believes.
I’m sure that one day we won’t need oil. But I’m also quite confident that we’re also (sadly) quite a few years away from self-driven electric cars dominating our motorways. As Wood also pointed out, 84% of global energy demand was met by fossil fuels last year.
Something needs to plug the gap; that something is oil. And I suspect that we’ll find that our margin of safety is a lot slimmer than is currently believed – particularly if Omicron marks the end of the pandemic, rather than the start of a new wave.
This is something we’ll be discussing a lot more in upcoming issues of MoneyWeek magazine. Subscribe now if you haven’t already.
