WTI eases back from above $72.00, remains on course to close out best week since August

Oil prices have been choppy on Friday, though have for the most part traded on the front foot and are on course for their best weekly performance since August. Front-month WTI futures began the session in the low-$70.00s after profit-taking weighed on the price on Thursday but briefly surpasses $72.00 at one point earlier in the session.

At the time, a not as bad as feared US inflation report for November spurred some risk-on sentiment across markets which had clearly been positioning for an upside surprise on expectations. This favoured crude oil prices at the time. In the subsequent hours, prices have ebbed lower again and currently trade in the mid-$71.00s, with gains on the day of still more than $1.0.

At current levels, oil prices have eroded between 50-60% of their post-Omicron emergence decline. This recovery has been aided by growing confidence in the notion that the new Omicron variant is set to be far milder than past variants like delta. According to Commerzbank "the oil market has… rightly priced out the 'worst-case scenario' again, but it would be well advised to leave a certain residual risk to oil demand in place”.

That residual risk is a referral to the potential economically harmful reaction to Omicron that some governments might/already have taken. Travel restrictions and work-from-home directives are a direct threat to fuel demand and one that markets aren’t taking lightly after the UK upped its Covid-19 curbs by implementing “Covid-19 Plan B” earlier in the week. This seems to be what is preventing oil from emulating the US stock market and recovering back to its pre-Omicron levels.

Early data suggests the virus is significantly more transmissible than prior variants (a Japanese study put it as 4.2 times more transmissible than delta) so global infection rates are bound to surge. Market participants will be nervously watching hospitalisation rates, which have so far not shown signs of a significant rise in South Africa (the epicentre of the outbreak).