During the peak of the coronavirus pandemic, the oil market was making headlines — but not necessarily for all the right reasons. Prices fell to the lowest levels ever experienced in the market’s history, with a drop of roughly 300%.
Although the market seemed to bounce back over the following years until now, the journey to a full recovery is far from over.
Another COVID-19 strain has been discovered, and on 26th November 2021, Omicron was designated a variant of concern by the World Health Organization (WHO). Oil traders will certainly be monitoring the effect this variant has on the market, as there have been concerns that travel restrictions will be reintroduced.
At the end of November 2021, crude oil experienced a huge decline in price — the worst drop since the height of the pandemic back in April 2020. Continuing into December, there has been a slight recovery of price, but levels are still far below the highs previously seen in October 2021, and considerably lower than pre-pandemic levels.
The Omicron variant
According to the WHO, a variant becomes of concern when its mutations may impact how easily it spreads and the severity of the illness it causes. There is still uncertainty on how transmissible the new variant is, and researchers around the globe are conducting studies to further understand Omicron.
With regards to trading, initially market volatility increased in reaction to the Omicron variant — not only for crude oil trading, but across the range of financial markets. Commodities are heavily influenced as the supply and demand for an asset change, and there’s a worry amongst investors that demand will significantly decrease, once again, with the emergence of Omicron.
This was first experienced in the height of the pandemic, where travel restrictions were imposed across the globe. With little to no need for fuel to run cars, public transport and planes, the demand for oil reached an all-time low. Prices dropped to negative levels for the first time in oil trading history.
As a new variant emerges, there is a fear that history could repeat itself.
The return of travel restrictions feared
There are two versions of events that could happen as a result of the new variant — there will be travel restrictions again or there will not. This is the dilemma faced by oil traders. If the findings from research into the Omicron variant discover that the new variant is less mild than expected, then it’s believed that the oil market will be especially bullish.
In fact, at the time of writing, oil prices were on the rise, as the general consensus felt that the new variant may not be as impactful as initially thought. The initial decline is thought to have been a result of fears of restricted travel, which in theory would lead to a drop in demand for fuel in the aviation industry particularly — a major factor that can affect the oil market.
The Organization of the Petroleum Exporting Countries (OPEC)
When it comes to the supply of oil, the market is influenced by the decisions of the OPEC. This is a collection of countries that collectively manage the amount of oil produced, and ensure the balance between supply and demand.
In response to the Omicron variant, and the continuous detrimental effects of the pandemic, the OPEC met on December 2nd to evaluate the output of oil and consider the next steps in production.
Previously, the OPEC agreed to raise production to 400,000 barrels per day, but this may be revoked in light of recent events. It’s believed that there will be discussions on the production levels, taking into consideration the dropping oil prices and the likelihood of the new variant affecting the level of demand.
As with any investment, traders should conduct extensive research before entering or exiting a position on the oil market. The discovery of a new variant, and the impact it has on the world, is a fundamental factor that will be closely monitored by those in the oil trade.
