By Barani Krishnan

Investing.com – Is OPEC the piedpiper to the oil market?

Playing the we-aren’t-troubled-yet-by-Omicron tune, the oil cartel and its allies blew an air of tranquility this week – even festivity, one might argue, for longs in the market – as the world huffed and puffed over the calamity that might come from the Covid variant. 

The “tune” from the OPEC+ alliance was that come January, there will be no change to its output. Decoded, it meant demand for crude will be rock-steady at the start of the new year despite the gloom of a supply surplus envisaged in the cartel’s own internal research for the coming quarter.

The longs in oil – making up for the original rats or children in the medieval-era tale in Hamelin – sucked up what OPEC+ played and sent crude prices higher after the alliance’s meeting on Thursday.

On Friday, however, some of the optimism that was blown into oil by the cartel’s allies became naivety as the equity markets capitulated from the negative mix of U.S. Jobs Reports for November and concerns about Fed Rate hikes in the next three months. There were also reports of more Omicron case across America.

However, this did not change the message OPEC was trying to get oil traders to believe. It said that the demand for crude would rise, and not fall, over the next months, as well that the company was maintaining the 400,000 barrels of crude per day that it promised to pump from July. The underlying message was: “Don’t short the market. Go long.”

If one were to consider the mixed messaging in oil supply-demand forecasts over the past few weeks, it’s hard to be either long or short.

In its closely-watched monthly report released on Nov 16, the International Energy Agency, which looks after the interests of consuming nations, said the “tight market” in oil was about to ease. According to the IEA, the foreseeable increase in oil production is 1.5 million barrels per day for the rest of 2021. The United States, Saudi Arabia, and Russia account for about half that number.

And while demand for transportation fuels continue to recover and a supply shortage in the market has forced some power plants to switch to using oil and refined products, “new Covid waves in Europe, weaker industrial activity and higher oil prices will temper gains,” the Paris-based energy watchdog said.

It is interesting to note that all this was done before Omicron emerged.

According to a Reuters account of an internal document, OPEC+ had forecast a worldwide oil surplus of 2,000,000 barrels per day for January, 3.4million for February, and 3.8million for March. This was according to a Reuters article. This forecast includes additional oil reserves that the United States, and other large consuming nations will sell over the coming months. 

Despite these concerns, the OPEC+ – Russia and Saudi Arabia – decided to keep pumping. Their chutzpah over how strong the market will be in the coming quarter was as infectious as a Covid strain, helping crude prices rebound forcefully from Wednesday’s four-month lows.

However, as the feel-good vibes faded over the weekend, OPEC returned to threaten traders with production reductions.

On Saturday, Secretary-General Mohammad Barkindo said that “we will continue to use what we know best in order to achieve stability on the oil market on an ongoing basis.”

Stripped of its gloss, it meant that the 400k in daily barrels the alliance had pledged since July might be the first to go if demand and prices don’t come its way by January. The alliance could also make further cuts. Don’t forget that the Saudis and their allies are still withholding some 5.0 million barrels of regular daily supply from the market as part of production cuts carried out at the height of the Covid-19 price cuts. This is something it will not hesitate to do.

OPEC is certain that oil market stability, sustainability, and affordability are only concerns when crude prices fall, not rise. During five years of OPEC’s leadership, Barkindo has repeated these phrases over and over again. Barkindo was smiling instead when the market surged by 20% between August-October.

OPEC has helped to stabilize the crude ship at least for now. Omicron is still a danger. Since the first U.S. case reported on Nov. 30, a total of at least 20 have  been detected across 12 of America’s 50 states. Several countries around the world have reported infection from this variant. The roller coaster ride to oil is now underway. 

Oil Market Activity & Price Roundup

U.S. oil prices dropped on Friday, posting a sixth consecutive weekly decline despite OPEC signalling that it is ready to reduce production at all times if Omicron continues to affect demand.

Oil prices increased on Thursday after closing lower for the fifth day in a row and then remained high for much of Friday. WTI or West Texas Intermediate benchmark, which is used to measure crude oil from the United States, was lower at settlement. Brent however, which is traded in London, saw a slight gain.

Analysts had read the initial bounce back as a sign of the market’s confidence in OPEC+’s decision to leave its output unchanged for now, with a caveat for change should demand collapse going into the first quarter 2022.

“Whatever initial comfort the market took with the OPEC decision seems to have evaporated and now there are fears again that this thing is going to come back and bite us in the rear,” said John Kilduff, founding partner of Again Capital, an energy hedge fund in New York.

Omicron’s story appears to have turned around the oil rally in 2021. It brought to an end the rise of crude prices that many believed would reach $100 per barrel or $90 by year end. WTI is still up 36%, while Brent has a 35% increase.

Health authorities have reported at least 8 more Omicron cases in the United States since Wednesday’s announcement of the first case in California. Five of these infections were in New York City, which is an epicenter for Covid-19 2020.

Dave Chokshi, New York City’s Health Commissioner, stated that the Omicron was spreading in New York City, independently of any infections from South Africa.

“This is not just people who are traveling to southern Africa or to other parts of the world where Omicron has already been identified,” Chokshi said.

At Friday’s settlement, the front-month January contract in , the U.S. crude benchmark, settled down 24 cents, or 0.4%, at $66.26 per barrel. WTI fell 2.8% for the week. After hitting an all-time high of $85.41 in the week ending Oct. 15, it was down 20% over the six previous weeks.

The global benchmark oil price, London-traded crude oil settled at $69.88, up 21cs or 0.3% on the most active February contract. Brent fell 4% over the week, but was up 18% in the six previous weeks. This is after it reached an all-time high of $86.70 at mid October 2014.

WTI Technicals

Investing.com’s regular contributor for commodity technicals, Sunil Kumar Dixit of skcharting.com, presents this:

WTI continued its bearish streak, reaching $62.40 for 6 weeks in succession and closing at $66.25, a critical low below the $67.07 50-week Exponential Moving average.

WTI prices are expected to continue moving forward. It has entered strong support zones and can extend selling to reach the 200 week Simple Moving Average (SMA) of $56.90, and the 100 week SMA (52.90).

Since WTI’s primary trend is bullish, corrections of $62-$57 is also a strong confluence area on the monthly chart that will attract value buying, triggering fresh moves up.

Gold Market Activity & Price Roundup

“Every crisis has its silver lining.” Or so, the saying goes.

And in gold’s favor is Covid’s Omicron variant and the crisis of confidence it has spawned in the global recovery from the pandemic.

All week, there was concern that gold might plummet into $1,600 territory. Federal Reserve Chair Jerome Powell, who announced that the bank would accelerate its taper of pandemic-era stimuli and allow for a faster U.S. rate increase, had raised expectations.

But fears about the Omicron’s potential impact on the United States and the world proved bigger in the end, triggering safe-haven buying in gold. That helped the yellow metal’s prices to hover in the high $1,700s and post a gain at the close of Friday’s futures trade in New York.

U.S. gold futures’ most active contract, ,, settled Friday’s trade up $21.20, or 1.2%, at $1,783.90 an ounce. It lost 0.2% for the week.

Gold’s relative strength also came on the back of the collapse of note, which fell more than 6% on Friday, though the remained strong all week.

“It’s odd but gold didn’t melt down on the Fed’s threat for a quick taper or rate hike, and instead coasted on the bigger worry associated with the Omicron,” said Phillip Streible, precious metals strategist at Blueline Futures in Chicago. “Talk about a crisis in need.”

To buttress the gold story, the International Monetary Fund even said the Omicron variant was likely to reinforce the IMF’s decision to downgrade global growth forecasts it made in October – a decision already in the works since the protracted impact of the Delta variant of Covid.

The gold technicals

Skcharting’s Dixit says: Gold spent the week trading with a bearish bias, extending its correction to $1,761 and settling at $1,783, well above the 61.8% Fibonacci retracement level at $1,768.

A daily and weekly closing price above $1768 could be interpreted as an indication of a short-term recovery from lows. It should initially reach $1795 However, a trade above $1,810 will be required to test the peak at $1,825.

If you fail to keep above $1780, it could lead to weakness of $1,750 or $1,735.

Disclaimer:Barani Krishnan is not a shareholder in any of the securities or commodities he writes about.