The plunge in oil prices in recent days was excessive, and traders “far overshot” the potential impact of the Omicron Covid variant on global oil demand, pricing in a massive 7-million-bpd slump, Goldman Sachs said on Wednesday.
Oil prices collapsed on Friday after the WHO qualified Omicron as a “variant of concern,” with markets anxious about the still unknown characteristics of the new strain, especially if it escapes existing vaccine protection.
Oil just saw in November its worst monthly drop since the start of the pandemic and the first lockdowns in March 2020.
Goldman Sachs, however, is still bullish on oil and sees the massive move lower from the past few days as excessive and equal to the market pricing in a “mammoth” drop in demand over the next few months.
“To put this into context, this would represent any of these extreme outcomes: (1) not a single plane flying around the world for three months, or (2) half as intense as the 2Q20 global lockdown, or (3) a world even worst-off than before vaccinations,” Damien Courvalin, Head of Energy Research & Senior Commodity Strategist at Goldman Sachs, wrote in a note as carried by Yahoo Finance.
The investment bank expects to see more evidence of the nature of the Omicron variant and the measures governments will take before potentially changing its current outlook, Courvalin added.
Before such news arrives, Goldman Sachs reiterates its “view that the market has far overshot the likely impact of the latest variant on oil demand with the structural repricing higher due to the dramatic change in the oil supply reaction function still ahead of us.”
According to Goldman, the Omicron variant plus the SPR releases coming in a few weeks would only be a $5 per barrel downside to its $85 price forecast for the coming months, MarketWatch notes.
There are a number of potential bullish factors to offset the bearish ones, including difficult negotiations on Iran’s nuclear program, OPEC+ pausing its monthly production increase, and more gas-oil-switching, Goldman Sachs says.
By Tsvetana Paraskova for Oilprice.com
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Only the final verdict from the WHO will calm the markets. Once this is done, oil prices will recoup all their losses in no time.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London