As we have been highlighting over the last several weeks, there are a number of factors putting downward pressure on oil prices, including increasing supply, strengthening U.S. dollar, declining sentiment of oil traders and the ongoing COVID-19 saga. At the end of last week, the advent of a new variant of COVID-19 had a major impact on oil prices. The price of Brent crude ended the week at $71.60 after closing the previous week at $78.66. The price of WTI ended the week at $68.17 after closing the previous week at $76.11. Also, as we have been forecasting, the Brent-WTI differential widened to $3.43 from the previous week of $2.55 and $1.26 for prior week.
With the decline, oil prices have dropped below the support level for the first time since Aug. 20 of this year. During that occurrence, oil prices rebounded quickly and then started moving back on an upward trend. For the upcoming week, we are expecting that oil prices will recover a portion of last week’s decline, but the subsequent price recovery will be muted.
As noted above, the appearance of a new variant—Omicron—is causing increased concerns about COVID-19 and the impact on economic activity and oil demand. The Omicron variant was first detected in South Africa, but other countries have already reported cases involving the variant—including Canada, Australia, the Netherlands and Austria. At this time, there are concerns that the variant is more transmissible and increases the probability of contracting COVID-19 for a second time. Countries are reacting by reinstituting travel bans, mask mandates and increased testing.