Brent crude futures fell $2.62, or 3.6%, to $70.82 a barrel after hitting an intraday low of $70.22, their lowest since August. U.S. West Texas Intermediate crude futures fell $2.84, or 4.1%, to $67.11 a barrel. The benchmark earlier dropped to a session low of $66.51, also its lowest since August. ”The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022 as governments prioritise health safety over reopening plans, of which there is already telltale evidence, from Australia delaying its reopening to Japan banning foreign visitors.”
Brent’s front-month contract on Tuesday switched to trade at a discount to its second-month contract, a market structure known as contango that indicates that the market is wary of near-term demand. The front-month contract had been trading at a premium to the second-month contract all month. Going further out, Brent’s front-month contract only traded 91 cents above its value in a half year, the narrowest premium since January 2021. WTI’s front-month contract is still trading in backwardation, or at a premium to its second-month contract, though that premium fell on Tuesday to a low of 23 cents, its narrowest since mid-September Fed Chairman Jerome Powell will also tell U.S. lawmakers later in the day the variant could imperil economic recovery, prepared remarks show. Oil plunged around 12% on Friday along with other markets on fears the heavily mutated Omicron variant would spark fresh lockdowns and dent global oil demand. It is still unclear how severe the new variant is.
With a weakening demand outlook, expectations are growing that the Organization of the Petroleum Exporting countries, Russia and their allies, together called OPEC+, will put on hold plans to add 400,000 barrels per day (bpd) to supply in January. “We think the group will lean towards pausing output hikes in light of the Omicron variant and the oil stockpile release by major oil consumers,” Commonwealth Bank commodities analyst Vivek Dhar said in a note. Pressure was already growing within OPEC+, due to meet on Dec. 2, to reconsider its supply plan after last week’s planned release of emergency crude reserves by the United States and other major oil-consuming nations to address soaring prices. “Following the global strategic reserve releases and the announcement of dozens of countries restricting travel… OPEC and its allies can easily justify an output halt or even a slight cut,” OANDA analyst Edward Moya said in a note. The increase in OPEC’s oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found on Tuesday, bringing a lack of capacity in some producers into focus ahead of the meeting this week.