Oil prices slide as Omicron variant clouds energy demand outlook

Any potential slowdown in demand does not appear to be as severe as the impact of earlier Covid-19 variants

The International Energy Agency says the global oil market is returning to surplus as Omicron impedes travel. AP

Oil fell for the first time in three days over concerns about the demand effect from the Omicron variant and tighter monetary policy.

Futures in New York dropped below $72 a barrel after rising 2.3 per cent over the past two sessions. Daily Covid-19 cases in the UK have jumped to a record high, while hospital admissions have surged across the US. The Bank of England unexpectedly raised interest rates for the first time since the pandemic struck in a sign that inflation is now of bigger concern to leading central banks than the virus.

Signs are also emerging of softening oil demand in Asia, while the International Energy Agency said this week that the global market had returned to surplus as Omicron impedes travel. The weakness is showing up in the market’s structure, with Brent momentarily flipping into a bearish contango on Tuesday.

This week traders were hit with conflicting signals on demand and supply, ranging from the central bank moves and new restrictions to limit the spread of Omicron, to declining inventories in the US. That has led to a generally risk-off attitude in oil markets, leading the aggregate volume of futures contracts on Thursday to drop to its lowest since August.

“There is still much uncertainty stemming from Omicron,” said Howie Lee, an economist at Oversea-Chinese Banking Corporation in Singapore. “Demand may be feeling the hit in different pockets, but does not appear to be as severe as the Delta outbreak for now. Price consolidation may continue for a while.”