Market Sees Minimal Pandemic Demand Destruction

Market Sees Minimal Pandemic Demand Destruction
Rigzone's regular market watchers look at the pandemic's effects on demand, OPEC+'s impending meeting, power prices and more.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers look at the pandemic’s effects on demand, OPEC+’s impending meeting, power prices and more. Read on to find out what they had to say.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Oil markets started the week on a high note as traders took on more risk aided by a bullish U.S. inventory report and despite the spread of the Omicron variant. WTI rallied to a five week high at just under $77.45 barrel during its seventh straight session of gains. Brent crested the $80 per barrel mark as the market continues to see minimal demand destruction coming from pandemic-related closures and restrictions. Daily cases of both Covid-19 variants are on the rise but symptoms are fewer and hospital stays are shorter for the vaccinated. However, the virus outbreak did put a dent in holiday air travel as thousands of flights were canceled due to ill staff. Prices are still below the seven year high of $84.65 per barrel set on 10/26/21.

This week’s crude inventory report indicated strong demand with the EIA’s weekly petroleum status report reporting that commercial crude inventories fell last week by 3.6 million barrels to 420 million barrels, now seven percent below the average for this time of year, while API report that inventories decreased by 3.7 million barrels. WSJ analysts called for a drop of 3.2 million barrels while the API had called for a decrease of 3.1 million barrels. Refinery utilization rose slightly to 89.7 percent from 89.6 percent. Total motor gasoline inventories decreased 1.45 million barrels and are now six percent below the five average for this time of year. Distillate inventories fell 1.7 million barrels and now stand at 14 percent below the five year average which could lead to heating oil shortages should cold hit the U.S. Northeast for a prolonged period. Crude oil stocks at the key Cushing, OK, hub gained 1.05 million barrels to 34.7 million barrels, or about 46 percent of capacity there, for the seventh straight weekly gain. 1.35 million barrels was withdrawn from the U.S. Strategic Petroleum Reserve, which now stands at 595 million barrels. U.S. oil production rose by 200,000 barrels per day to 11.8 million barrels per day  vs. 11 million barrels per day at this time last year. And, the U.S. added seven new drilling rigs last week.

Venezuela reported producing one million barrels per day on 12/24/21, the largest one day output since 2019, when U.S. sanctions hurt their exports. However, that level is not expected to be maintained consistently due to unreliable infrastructure. Meanwhile, Mexico’s PEMEX announced that it will stop exporting crude in 2023 as its own refining needs will cover production. The national oil company recently acquired a 50 percent interest in the Deer Park, TX, refinery and is building another in southern Mexico. China, on the other hand, is cutting by nine percent the amount of crude it allows its refineries to import for early 2022.

…The S&P 500 hit a record close this week while the Dow reached an intra-day High. All three major U.S. stock indices look to settle higher on the week. The U.S. dollar traded lower, helping support oil prices.

Natural gas crashed this week, breaching the $3.60/MMBtu mark despite a bullish storage report and after trading over $4 for five sessions. Mild temperatures have finally reached the UK and Continental Europe providing a break from record-high natural gas prices while in the U.S., unseasonably mild weather has lasted throughout most of December…

Jon Donnel, Managing Director, B. Riley Advisory Services: All indications point towards OPEC+ maintaining production increase for February when the group meets next week. This makes sense given the relatively strong demand data points heading into the end of the year. The market appears to have largely priced this scenario in as crude prices continued to climb during the week even as this chatter picked up. Omicron impacts remain a risk, but many of the announced public health policies are less restrictive to economic activity than prior plans and will have less direct impact on longer-term demand.

Rigzone: What were some market surprises?

Donnel: Oil prices increased despite the increasing Omicron case counts as U.S. crude and products inventories showed meaningful declines during the week driven by strong transportation demand during the holiday season. Preliminary indications are that Omicron has less serious health impacts than prior strains and the CDC modified its guidelines suggesting people with positive tests quarantine for five days instead of ten and that vaccinated people exposed to Covid could skip quarantine all together in an attempt to reduce staffing disruptions. These policy revisions were unexpected given the rapidly increasing case counts across the U.S. but will ultimately help support crude and products demand.

Seng: Record daily cases of Covid-19 at both the national and state levels had no impact on oil and gas prices. The market was aware of the thousands of airline flights that were canceled yet seemed to ignore that demand decrease.

Mark Le Dain, Vice President of Strategy with the oil and gas data firm Validere: The week saw more industrial operations in Europe halting activity due to high power prices, with Alcoa most recently announcing a two year halt of aluminum production at its plant in Spain. It costs a lot to stop and restart these plants so these aren’t easily reversed decisions. Power prices, which have increased as much as ten times historicals in some countries, are a result of the continent not getting enough cheap gas at the same time that an unexplainable shutdown in nuclear is occurring, while intermittent renewables have increased. The world still needs stuff made so this unfortunate trend of shutdowns will simply mean that industrial assets are relocated to countries with higher emission grids, driving slower global reductions in emissions. 

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