By Barani Krishnan

Investing.com – After being absent for approximately six months, news reports about new Covid spikes around the world are back on the radar. What will this mean for crude oil prices? Or, rather, what will OPEC+ respond to?

To most oil bulls, even discussing Covid’s impact on oil demand is a non-starter. The pandemic, according to them, is a convenient excuse for short-sellers who want to end the oil rally. They insist that the market is still in an extended structural bull market, with underinvestment and rampant demand, both of which cannot be fixed easily.

To put it in perspective, the number of people in the long-oil constituency who believe what’s reported in the media about the virus is probably about the same number among President Joe Biden’s rivals who believe that he won his election fairly. 

Every datapoint on infection spread, impact and mitigation is met with varying degrees of disbelief, scorn and rebuttal by this group, which is particularly annoyed with how media coverage of the virus had accelerated this week’s 6% loss in oil.

But OPEC+’s response to the matter will be entirely different. 

Notwithstanding, the 11% drop from the year’s price highs, the global oil producers alliance will feel vindicated somewhat by the new blowup in Covid caseloads because this is exactly what it has been cautioning about for months – or rather “the excuse” it has been using for not adding meaningfully to barrels in the market.

Despite being pressed by other consuming nations since June to release more of its 5.0 million barrels of daily supply, OPEC+ refused to budge as part pandemic-era reduction cuts. 

It maintained that the market was adequately supplied – amid fears to the contrary that sent crude prices to seven year highs and inflation to red-hot levels in the top four consuming countries — the United States, China, India and Japan.

These same four men had devised a strategy in recent weeks to use some of their crude oil reserves to bring down the price of oil. This was in direct defiance to the 23-nation OPEC+, which includes the original 13 members of Saudi-run OPEC, and 10 other oil-producing countries steered more by Russia.

Reports earlier in the week indicated that the reserve release plan cracked the $80 support for crude. However, news flashes from Europe reported that Austria was in a preemptive lockdown due to a Covid crisis and that Germany was looking at something similar. Reports also indicated that more European countries considered tighter social regulations amid the ongoing Australian shutdown. The U.S. case load is increasing as well. This news prompted oil bears to rush for the cash, pushing crude oil up to $75.

The world now awaits OPEC+’s reaction. On December 2, the alliance will be meeting in just two weeks. Expectations are high that the alliance will announce counterstrikes in order to prevent prices from falling further. 

In fact, even before this week’s bearish turn, the cartel had cautioned in its monthly report that it expected lower demand for crude in the fourth quarter. According to the Paris-based International Energy Agency which is concerned about oil consumers, that forecast was supported. They also stated that U.S. production of oil would be greater in the coming quarters. These warnings were prescient, but they have been a foundation for what OPEC+ may announce over the next few weeks. 

First, the cartel must put into effect the promise of 400,000 barrels/day increase since the beginning of the second quarter – an offer that it has barely kept. Depending on the severity of the next pandemic, OPEC+ may increase production cuts. This could help to restore some of the $10 crude oil lost since October’s highs. 

However, prices may fall more than they rise. Jeffrey Halley from OANDA Asia-Pacific research reminded us about the old wisdom that markets are more rational than investors. The trend of oil falling over the past 4 weeks could persist. 

The oil ministers of OPEC+ know that too, with leading voices like Saudi Arabia’s Abdulaziz bin Salman and UAE’s Suhail al-Mazrouei expected to make some grim announcements before the Dec 2 meeting to try and position the market their way. 

Still, there’s nothing like the combination of soaring demand and tight production to send oil prices higher. That demand is likely to be less in the future if there are more countries that lock down. Such a situation would slow the return to work and recovery in aviation. These together make up the majority of gasoline, diesel, or jet fuel consumption.

Also, the threat by the so-called “consumers’ cartel” in oil, to use their reserves to fight back OPEC+, will likely remain, putting a cap on any rally. The threat is not taken seriously by many. Fewer believe that the threat will result in a significant impact on prices or even that it will happen. Strangely, even with all of the pessimism, scorn, and the existence threat likely to have an impact on crude oil prices going forward, it fell by 4%.

For now, oil longs still have strong and } and to count on. These have helped sustain oil’s upward momentum for months now.

If the U.S. market wants to take advantage of the energy-related heating that can be used to heat up the transportation fuels in case of severe Covid outbreaks, it must also keep the U.S. winter cold cycle running on time. 

“It looks like the music has stopped for now for oil bulls,” John Kilduff, founding partner at hedge fund Again Capital, said. “If the weather disappoints for any reason, expect $70 to be the peak, with lower $60s likely if Covid cases were to worsen.”

Oil Price Roundup

The U.S. crude benchmark contract for January settled lower at $75.94 per barrel, or $3.91. 

WTI lost 5.8% for the week after a rally of 18% over nine consecutive weeks. Just in mid-October, the U.S. crude benchmark  traded at a seven-year high of $85.41. WTI has risen 57% over the previous year, despite the week’s slump.

London-traded oil settled at $78.89/barrel, down 2.9%. 

The global benchmark oil price fell by 4% for the week. This is after a rally of 18% over seven consecutive weeks. Brent reached a 7-year peak of $86.70 in mid October. The stock is up 57% year-over-year despite the decline in the last week.

Gold Market & Price Roundup

Gold posted its first weekly loss in three, but bullion’s defenders held defiantly at around the mid-$1,800 level as Friday’s trade dwindled to a close – despite a break below the key psychological level earlier.

The gold price has settled just one day higher in this week’s week. This is a signal that the rally which began in October’s penultimate weeks had come to an end.

There were still some chances that the yellow metal would rebound this week, despite the efforts of the crowd to maintain the spot bullion price and the front-month COMEX futures in New York.

“Gold is stuck in a broadening formation and that should remain the case given next week’s shortened trading week,” said Ed Moya, analyst at online trading platform OANDA.

“Inflation and Fed speak are the primary catalyst for gold and right now traders will need to see what happens over the next couple of weeks before having strong conviction on assessing what the Fed will do regarding interest rates,” added Moya.

U.S. gold futures’ most active contract, , settled Friday’s trade down $9.80, or 0.5%, at $1,851.60 an ounce. This earlier session low, $1,843.60 was reached and it fell nearly 1% for the week.

Although swings have been below $1850 this week for December gold, they also hit a 5-week high at almost $1880. Market bulls are confident that the yellow metal will still rise to $1900 over the next few days, thanks to U.S. inflation themes.

Bullion was always touted as an inflation hedge. But it wasn’t able to live up to that billing earlier this year as intense speculation that the Federal Reserve will be forced in a faster-than-expected rate hike had sent Treasury yields and the dollar rallying instead, at bullion’s expense.

The trend has slowed somewhat since Fed Chair Jay Powell, earlier this month, assured that any rate increase that comes after the second half of next year will not be a surprise. 

Last week, the Labor Department reported that the U.S. Consumer Price Index (which measures a range of products including gasoline, health care, groceries, and rents) rose 6.2% in the 12 months to October. This was the highest growth in the CPI since November 1990. Its acceleration was mainly due to fuel pump prices at their seven-year peak. 

Since then, the , a key indicator of real interest rates,  has hit three-week highs above 1.6% and the has reached a 16-month peak above 96. This combination could have proved fatal for gold. However, the threat to gold has been largely averted this time.

Disclaimer: Barani Krishnan doesn’t hold any positions in securities and commodities that he discusses.