WTI back under $79.00 as geopolitical worries ease, still on course for solid weekly gains

• WTI slipped back under $79.00 on Friday but remains on course for substantial weekly gains.
• Supply/geopolitical issues have been key drivers of oil this week, with the broader macro story taking a back seat.  

Oil prices have come under modest selling pressure on the final day of the first trading week of 2022, with front-month WTI futures dupping back below $79.00 in recent trade from earlier weekly highs above $80.00. At current levels in the $78.75 region, WTI is still on course to post a weekly gain of around $3.50, which would mark a third successive week in the green. Order appears to have been restored in the capital city of Kazakhstan, with the President declaring constitutional order restored after Russia sent paratroopers to help the government quell widespread protests which had turned into an uprising.

Crucially for oil markets, it appears that there hasn’t been a lasting impact on Kazakhstan’s 1.6M barrel per day (BPD) in output, so Friday’s losses may represent a modest reduction in geopolitical risk premia. But output problems elsewhere amongst OPEC+ nations remain a key theme for oil traders. Reports earlier in the week said that Libyan output had dropped to just 729K BPD from recent highs of 1.3M BPD amid infrastructure maintenance work. Libya’s most recent output hiccup is indicative of a broader struggle of many of the smaller OPEC+ nations to keep up with rising output quotas in recent months.

For instance, a survey by Reuters earlier in the week showed that OPEC+ output rose just 70K BPD in December versus a more than 250K allowed output increase, amid declining output in Libya and Nigeria. That took the group's compliance to 127% - in other words, OPEC+ nationals are producing 27% less than allowed under their current output quotas. This has been a key source of support for oil markets this week and the theme of OPEC+ struggles to up supply is set to remain a key talking point in 2022.

Oil prices have this week deviated from trading as a function of the broader macro story, gaining despite steep losses in US equities (primarily in tech) in wake of a hawkish Fed minutes release and sharp upside in bond yields. Rocky sentiment in equities adds to the downside risk for crude oil prices at these levels, with crude oil relatively more “expensive” than if stocks were still trading close to record levels. Traders will be attentive to how the broader macro story plays out next week and whether this comes back as a major crude oil market driver.