Analysis: Omicron variant leads to lower oil prices. Will we pay less at the pump?

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The Omicron variant suddenly attacked ordinary people and investors, and crude oil fell 15% in a single session. Thus, the risk of additional restrictions similar to the first lockdown affected investors’ willingness to buy. If current vaccines prove ineffective against Omicron, travel will be reduced, flights will be suspended, people will stay home and demand for oil will fall, says international stockbroker XTB Romania, a company listed on the Warsaw Stock Exchange.

Looking at Austria, where another lockdown has been introduced, mobility has fallen well below levels we saw a few weeks ago or even before the first wave of the pandemic.

The majority of the population would prefer much cheaper oil, but not OPEC+ (the 13 OPEC member countries plus 10 other oil-exporting countries). If the group already sees a clear oversupply of oil in Q1 2022, then, motivated by a further drop in demand due to Omicron, OPEC+ could initiate further measures.

Will we pay less at the petrol stations? Probably yes! However, it should be remembered that the price of gasoline does not only depend on the price of oil.

The components of petrol and diesel prices are in most cases: unrefined oil, refining margin, distribution and marketing, taxes.

In the United States, the share of crude oil in the cost of fuel is up to 50%. On the other hand, in countries that do not produce oil, distribution costs and taxes account for a much larger share.

So even if prices are now 25% lower than at the current market peak, fuel prices will only fall by a few percent. That’s why some countries are deciding to take other measures, such as reducing VAT or excise duties.

Seasonality points to limited demand at the start of the new year. In such a case, the growth trend would be slowed down anyway. Therefore, we should not expect major efforts from OPEC+. On the other hand, the group would like to keep prices around $70-80 per barrel, which allows for long-term planning of future exploitation projects. Therefore, in the future, we should expect additional actions from OPEC+ aimed at keeping the price in this range.

The coronavirus pandemic has changed many things around the world. From an investor perspective, volatility in financial markets has never been higher.

On the other hand, from the consumer’s point of view, prices have not changed so dramatically in such a short time before COVID-19.

Where do investors and consumers cross paths? This usually takes place in the commodity market, and the most important commodity is, of course, oil.

The emergence of COVID-19 has led to unprecedented anomalies in the oil market. At one point, the price of a barrel of oil dropped significantly below zero. Because of restrictions around the world, many people stopped traveling, flying, or even going to the shops.

Because of the huge mismatch between supply and demand, the Organisation of Petroleum Exporting Countries (OPEC), together with other major countries, decided to jointly limit production to restore normal market prices. Production restrictions imposed by OPEC and other producers such as Russia continue to this day.

In the meantime, however, measures have been taken to stimulate the economy after the stagnation of the coronavirus pandemic. Tons of cash has been injected by central banks and governments, leading to a significant recovery.

There were fears that oil might run out, which is why OPEC+ decided to moderately restore production. However, this process proved too slow to meet market expectations, resulting in a 100% increase in prices.

There were even indications that the price would rise to $100 per barrel, which has been a problem for consumers in the past. Too high prices could have reduced demand.

In recent months we have seen several waves of coronavirus and restrictions. They have had no real impact on the market, other than production expectations.

Typically, selling riskier assets such as oil takes about 2 weeks. Given the expected next wave of COVID-19, OPEC+ decided not to increase production.


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