WTI choppy, now back above $66.00 with traders in two minds about OPEC+ output hike decision

• It’s been a choppy day for oil, with traders in two minds about the OPEC+ decision to hike January output.
• WTI has swung between lows in the $62.00s and highs above $67.00, and currently trades a tad higher near $66.00.

Oil prices have had a choppy day on Thursday. Front-month futures of the American benchmark for sweet light crude oil, called West Texas Intermediary or WTI, swung between lows at $62.50 and highs just above $67.00, a near $5.0 range. At present, WTI is trading close to the $66.0 mark and is slightly in the green on the day.

OPEC+ press ahead with output hikes

The day’s price action reflects the market’s ongoing struggle to ascertain what's next for the crude oil demand outlook. The big news of the day was OPEC+’s decision to surprise markets by not choosing to halt output hikes in January but to press ahead with another incremental 400K barrel per day output hike on the month. The decision cause initial selling pressure, which is when WTI hit the $62.00s, but the dip was quickly bought into.

Some analysts interpreted the OPEC+ decision as a positive for oil markets as it signaled that the group’s confidence in the market had not been rocked by recent Omicron-related developments. OPEC “thought it might do more damage than good, to pause on production increases and that it might send a signal to the market that the demand destruction priced in was real,” said a senior analyst at Price Futures Group. “I think the OPEC decision is sending a signal of confidence that they believe the price action recently has been overdone” the analyst added.

WTI still well below pre-Omicron levels

But WTI continues to trade some $12 below its levels this time last week. Of course, the emergence of the new Omicron Covid-19 variant has been the main driver of the downside. A number of countries have restricted flights, delivering an immediate blow to the near-term outlook for crude oil prices via a dampening of jet fuel demand. This partly explains the recent drop, but another big reason for lower crude oil prices is simply the high level of uncertainty about the new variant. The key questions are 1) how transmissible is it? 2) how well does it evade vaccine/natural immunity? and 3) how severe are the symptoms when infected?

Early evidence strongly supports the notion that the new variant is significantly more transmissible than prior variants, which obviously is not good news. Meanwhile, a study on the Omicron variant released by South Africa’s NICD on Thursday showed that re-infection was three times as likely as compared to other variants. This adds further evidence to the hypothesis that Omicron is better able to avoid natural immunity (acquired by infection with a past Covid-19 variant) than past variants have been. It seems very likely this would also apply to vaccine-acquired immunity.

More reassuringly, early front-line experience of doctors in South Africa suggests the symptoms are much milder than other variants. But it is very early days still these early hypotheses could quickly shift. Thus, markets are set to remain highly headline-driven. The best-case scenario for crude oil would be if Omicron proves to be very mild and actually something health officials want to let spread around the world in order to reach herd immunity and eradicate the nastier Covid-19 strains (like delta).