WTI dips back into low $71.00 as risk aversion sets in

• WTI has dipped back from Thursday’s test of weekly highs at $73.00 to the low $71.00s.
• Risk appetite has faded as traders mull this week’s hawkish central bank events and the evolving Omicron situation.

Oil prices are under pressure on Friday amid a downturn in the market’s broader appetite for risk as traders mull this week’s hawkish turn from many G10 central banks and a continued rise in Omicron infection rates across the world. After matching early weekly highs just under $73.00 on Thursday, front-month WTI futures have since dipped all the way back to test the $71.00 level. At current levels in the low-$71.00s, WTI is set to end the week lower by about 50 cents or 0.8% and close to the centre of this week’s $69.40-$73.00ish range.

Major G10 central banks are becoming more hawkish, with the Fed doubling its QE taper pace and indicating three hikes in 2022, while sounding bullish on the economic outlook for 2022 despite Omicron. Meanwhile, the BoE actually implemented a surprise 15bps hike and the ECB laid out its QE taper plans for 2022, with the PEPP to end as planned in March. Some saw this as a vote of confidence in the durability of the global recovery, which perhaps aided crude oil markets at the time, though on Friday, focus has returned to a worsening Omicron picture.

Cases are at record highs in the UK, Denmark and South Africa and surges in the EU and US are expected next. Further pandemic curbs are likely as authorities scramble to slow transmission, though the most important uncertainty right now is whether the surge in infection rates will translate into a surge in hospitalisations and ultimately fatalities. Uncertainty about this is likely to keep oil market participants in two minds until the end of the year, meaning WTI may well remain trapped within recent ranges.

Goldman bullish on oil demand

Damien Courvalin, Goldman's head of energy research, said on Thursday that the Omicron variant hadn’t had much of an impact on mobility or oil demand as of yet according to high-frequency data. Moreover, oil demand in 2022 was expected to be strong amid rising global capital expenditure and infrastructure construction, he added. As a result, Courvalin said that Goldman sees average daily oil demand hitting fresh record highs in 2022 and 2023. Thereafter, Goldman expects steady growth in oil demand until the end of the decade until demand peaks at about 106M barrels per day, amid a gradual energy transition.