Oil slumped and Brent's prompt spread flipped from backwardation into contango following the latest monthly report by the International Energy Agency, which said that global oil markets have returned to surplus and face an even bigger oversupply early next year as the omicron variant impedes international travel.
According to the IEA's Oil Market Report, supplies are rebounding around the world, from the current OPEC+ ramp-up and sales from strategic reserves (which will be reversed very soon at the rate prices are sliding) 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 IEA said. “The steady rise in supply, combined with easing demand, has considerably loosened our balances.”
And while the IEA lowered forecasts for global oil demand in the first quarter by 600,000 barrels a day, overall the agency saw a muted impact of just 100,000 barrels a day on next year’s fuel consumption as vaccination campaigns limit the spread: “The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is under way."
While oil prices had held up so far amid the emergence of the new Covid strain as fuel use has yet to suffer a major hit, the latest news together with the market's risk off tone sent Brent below $74...
... and flipped the prompt spread into contango for the first time this year.
“The first quarter of 2022 will clearly be challenging for oil,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “The outlook for global demand is obviously quite a wild card.”
As Bloomberg notes, 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 ongoing slide in oil turns to spotlight back to OPEC+ and whether it the expanded cartel will put on hold its planned output expansion, after the organization agreed, with some persuasion from U.S. President Joe Biden, to press on with restoring production it halted during the pandemic. Meanwhile, the U.S. and other consumers are set to release barrels from emergency reserves after deciding that OPEC’s increases didn’t go far enough.
At the same time, producers besides the Organization of Petroleum Exporting Countries and its partners are ramping up output toward all-time highs -- namely the U.S., Brazil and Canada, according to the IEA. 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.
Meanwhile, in its own monthly report released on Monday, OPEC boosted estimates for oil consumption in the first quarter by 1.1 million barrels a day, but said it still sees a surplus.