WTI dips to weekly lows in mid-$75.00s amid choppy year-end trade, remains on course for massive annual gains

Front-month WTI futures slipped to fresh lows for the week near $75.00 per barrel in recent trade amid what appears to be some modest profit-taking in holiday-thinned trading conditions on the final session of the year. Prices have since rebounded to around the $75.50 mark, but choppiness may continue into the US session amid expectations for a continued lack of liquidity.

Intra-day volatility that has seen WTI dip just under $1.0 on the session shouldn’t distract from the fact that oil prices are set to post their best annual return since 2009. WTI is set to post gains of more than 55% having surged from lows last January of underneath $50.00 per barrel. Crude oil has surged this year as the global economy has recovered from the 2020 pandemic-induced recession and become more resilient with time to successive waves of the virus, largely thanks to rising vaccination rates.

After surging as high as the $85.00s in October (annual gains of nearly 80% at the time), oil prices saw a sharp correction lower in November and into December on fears of economic disruption and crude oil demand destruction after the emergence of the new, highly transmissible Omicron variant of Covid-19. However, as evidence has built over the last few weeks that the new variant is far milder than any prior strains of the virus and government’s have held off on imposing lockdowns, risk-appetite and crude oil prices have recovered sharply. WTI is thus set to post a monthly gain of about $8.50 or nearly 13% and is more than $12.50 or 20% up from earlier monthly lows in the $62.00s.

But Omicron risks remain, with countries across the world (including the US, UK and Australia)reporting record daily infections and this is capping oil’s gains. The fact that New Year’s celebrations have been canceled across many parts of the world is indicative of some of the near-term risks faced by the global economy and could perhaps be behind some of Friday’s year-end profit-taking. Separately, some investors fear supply-side dynamics could weigh on oil prices in 2022 as OPEC+ and US output climbs.

These fears were on show in a poll released by Reuters on Friday. The median forecast of survey participants was for WTI to average slightly more than $71.00 over the course of 2022, a downwards revision of expectations for next year’s oil prices from the November poll. In the prior poll, the median investor forecast had been for WTI to average just over $73.00 next year. Sources speaking to Reuters earlier in the week said that the cartel looks on track to agree to hike output by 400K barrels per day again in February. According to analysts at Julius Baer, “with oil demand growth slowing, supply growth persisting, and the energy crunch easing, we see the oil market balance expanding rather than shrinking in 2022 and thus expect prices to trend lower from today's levels.”