…But downside for risk assets is likely to be limited and European stocks may outperform Wall Street moving forward.
Demand concerns were already on the rise and the last thing
crude oil bulls were expecting to hear was another rollover of the current policy from the
OPEC+ group. Yet contrary to some expectations for only a moderate hike or no hike at all for January, that’s exactly what happened. So, the OPEC+ will raise output by another 400K barrels per day, adding more oil to the global supply and thus completely removing the threat of supply shortages at a time when demand is expected to fall.
Indeed, crude oil prices were coming under renewed pressure ever since yesterday afternoon when the first case of the new variant was detected in the US. But in light of the OPEC+ decision, they have just hit fresh weekly lows, with WTI slipping to $63 and Brent $66 – both at their weakest levels since August.
Still, the OPEC+ has now stated that it may adjust future production plans if the market changes. So, I suppose it all now depends on Covid and lockdowns. If the situation deteriorates then the OPEC+ will stop further production hikes, possibly as early as their next meet on January 4th. Otherwise, the current policy may rollover as planned.
As far as equities are concerned, well as we have been warning, the markets remain volatile, and that trend is likely to continue for the next couple of weeks as we get more information about the new variant of Covid.
Omicron has started to pop up all over the world, causing a sharp reversal yesterday on Wall Street. Sentiment has since remained bearish towards all sorts of risk assets.
There is of course the risk we will now see further weakness for stocks and crude oil, after the first real attempt by the bulls to buy the dip, failed yesterday.
Still, the
downside is likely to be limited until the impact of the new variant of the virus becomes clearer. In any case, a repeat of the 2020-style drop looks very unlikely. After all, the world is in a much better place to deal and live with the new variant of Covid. What’s more, it could be that this new variant may not be as dangerous as some people fear.
Looking further out, it is possible that the
European markets may outperform Wall Street: