It appears that oil market oversupply may already be upon us, with demand being hit hard by Omicron and by China cracking down on its independent refiners, OilPrice reports. 

Oversupply has been one of the main talking points in oil markets in recent months, and now it seems that it will soon be upon us. The softening of Asian oil demand, triggered by China’s zero-COVID measures and Beijing’s continued clampdown on independent refiners in Shandong, has curbed the enthusiasm of market bulls while Brent is now flirting with contango, a sign of looming oversupply. This being said, there remain some upside factors, primarily the low level of inventories globally – which are now roughly at March 2020 levels. With Omicron cases doubling daily in European countries, however, it seems supply is going to shoot past demand. Against this background, ICE Brent slid to $73 per barrel, whilst US benchmark WTI was trading at around $70.5 per barrel.

With China seeing its electricity mandates eased, coupled with the recent strengthening of the Dubai complex, opened up crude arbitrage from Europe, Africa, and the Americas into the Asia Pacific region, implying that the currently meager flows (down 30% y-o-y at 2.8 million b/d) should see an uptick in Q1 2022. COVID restrictions hit China’s petchem sector. With China’s Zhejiang province having its first locally-transmitted COVID case in early December and then going into maximum stringency, petrochemical plants in the region were forced to cut run rates to roughly 50% of capacity on the back of logistics constraints and overall control measures, OilPrice said. 

On Tuesday, the World Health Organization said the Omicron variant was spreading at an “unprecedented” rate, prompting markets to edge lower. “The surge in new COVID-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is under way,” the Paris-based IEA said in its monthly oil report. Governments around the world, including most recently Britain and Norway, have tightened restrictions to stop the spread of the Omicron variant. The IEA lowered its forecast for oil demand this year and the next by 100,000 barrels per day (bpd) each, mostly because of the expected blow to jet fuel use from new travel curbs.

Oil futures prices dropped toward $73 a barrel on Tuesday after the International Energy Agency said the Omicron coronavirus variant is set to dent global demand recovery. U.S. data showing producer prices at 11-year highs reinforced market expectations of faster stimulus tapering by the Federal Reserve, which meets this week. This supported the dollar and weighed on oil, which typically move inversely. U.S. producer prices rise to 11-year high. Permian oil output forecast to hit record high in January. Omicron impact aside, oil supply set to top demand. Output in the largest U.S. shale basin is expected to surge to a record in January, according to a forecast from the U.S. Energy Information Administration.

OPEC remains upbeat on 2022 oil demand. On Monday, the Organization of the Petroleum Exporting Countries raised its world oil demand forecast for the first quarter of 2022 and stuck to its timeline for a return to pre-pandemic levels of oil use, saying the Omicron variant’s impact would be mild and brief. OPEC+, which includes OPEC and other producers including Russia, plan to boost supply every month by 400,000 barrels per day (bpd) after sharply cutting output last year, Reuters reports. 

IEA cuts first-quarter demand view by 600,000 barrels a day. Extra output is coming from OPEC+, the U.S., Brazil and Canada. Global oil markets have returned to surplus and face an even bigger oversupply early next year as the omicron variant impedes international travel. Supplies are rebounding around the world – from the current OPEC+ ramp-up and sales from strategic reserves, to record output in the U.S., Canada and Brazil next year. With jet fuel demand also faltering amid the new virus strain, global oil inventories could swell at a rate of 1.7 million barrels a day in the first few months of 2022. “Much-needed relief for tight markets is on the way, with world oil supply set to overtake demand starting this month,” the Paris-based agency said in its monthly report. “The steady rise in supply, combined with easing demand, has considerably loosened our balances.” Overall, the IEA sees a muted impact of just 100,000 barrels a day on next year’s fuel consumption as vaccination campaigns limit the spread, Bloomberg said.

“The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is under way,” it said. But the combination of a seasonal pullback in fuel demand, deepened by the effects of omicron and coupled with resurgent supply, is setting the market up for a potential glut early next year. The IEA lowered forecasts for global oil demand in the first quarter by 600,000 barrels a day. American production jumped by 340,000 barrels a day in November amid continued gains offshore, and as higher prices allowed shale explorers to boost drilling, according to the IEA.