Oil prices around the world have soared in the past three weeks, with WTI rising to $82.80 from $66 and brent topping $85 today.
The gains have taken place even as omicron has spread and had significant measurable negative effects on gasoline and jet fuel demand.
What's going on?
There's no clear answer but here are some theories:
1) Short squeeze
A clear macro trade on the emergence of omicron was selling oil. The effects of pandemic lockdowns are well-known and the knee jerk reaction in oil to the emergence of omicron was to sell oil. It fell in a straight line to $68 from $78 in a single day and continued lower for a few more days afterwards.
The macro shorts in oil may be throwing in the towel in the past few days. The rally in oil yesterday and today came on no-news and that's evidence of a squeeze on positioning.
2) OPEC+ doesn't have the oil
Evidence continues to mount that OPEC and Russia don't have the capacity to continue to add 400k bpd each month. For sure there's extra capacity in Saudi Arabia and the UAE is itching to pump more but Russia is missing its quotas as are a number of other member states. I've been writing about this for ages and it makes sense, given that no one has invested enough in oil maintenance capex for a number of years. If OPEC is bluffing and covid quickly fades, we'll surely be in a situation of undersupply late this year.
3) Macro optimism
The market more broadly is looking beyond omicron and towards a world that's closer to normal. Obviously, this isn't going to happen in a month but there's good reason to believe that we'll soon collectively have much better protection against covid and can resume normal life. In a sense, this trade may be the opposite of the short-squeeze theory, with specs instead buying up front-month futures with the intention of rolling. Ultimately, this optimism will need to be reflected in demand.
The other side
What I worry about is a sustained drop in Chinese demand due to omicron. Much of the world has learned to carry on alongside the virus but more than 20 million people in China are currently in a hard lockdown. I expect that number to grow in the coming weeks and that's something that could severely hurt physical demand.
From where I stand, that's enough reason to sell oil and return to the sidelines near $85 in WTI.