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Home / Industry / Energy /  Omicron potentially a stabilizing force for OPEC+

With the weight of oil markets, member states’ fiscal balance sheets and geopolitical interests often pulling it in different directions, OPEC+ can be one unwieldy ship for Saudi Arabia to maneuver. Ironically, the Omicron variant of Covid-19 could prove to be a stabilizing force.

The Saudi-led oil cartel and its Russia-led allies—the “plus"—are scheduled to meet Thursday to decide whether to stick with their plan to increase monthly oil output by 400,000 barrels a day in January. After news of the Omicron variant broke Friday, sending Brent crude prices plunging by more than $9 a barrel, the Organization of the Petroleum Exporting Countries postponed its technical meetings to evaluate its impact before Thursday’s meeting. After another wave of fear about the virus hit markets Tuesday, Brent was down by almost $11 a barrel, or 13%, since Thanksgiving.

The selloff creates a thorny situation for forecasting demand but also some opportunities for Saudi Energy Minister Prince Abdulaziz bin Salman, who often portrays OPEC as a central bank for the oil market. On the one hand, if the expanded group decides to continue with its increase of 400,000 barrels a day, it could signal confidence about demand, staving off panic, while winning the favor of oil-consuming nations. Even after their recent tumble, oil prices aren’t at levels that would cause key OPEC+ nations budgetary distress. JPMorgan has estimated that the fiscal break-even price for the largest OPEC+ constituents is expected to average $72 a barrel in 2022.

On the other hand, if the group chooses to keep output unchanged for now, Omicron presents a convenient excuse, avoiding significant rifts with the Biden administration and within OPEC. The White House “could give OPEC a pass for a pause given the fluid nature of the global policy response to the variant," wrote Helima Croft, global head of commodity strategy at RBC Capital Markets, in a research note.

Before Omicron, an OPEC+ pause on a production increase would have been politically loaded—both within the cartel and outside it. After the U.S. and other key oil consumers announced a coordinated release from their strategic petroleum reserves early last week, The Wall Street Journal reported that Saudi Arabia and Russia were thinking about doing so. That would have sent a pointed message to oil consumers that coordinated SPR releases would only be met with counterbalancing acts by the cartel—a risky move considering threats from the U.S. to reintroduce so-called NOPEC legislation, which would open the gates for oil-cartel members to be sued on antitrust violations. It might have also worsened rifts within OPEC. The United Arab Emirates and Kuwait, both of which have close ties to the U.S., were said to be resisting a pause before the latest price rout, according to the Journal’s report.

Now a halt seems more likely. Even before the SPR release and the Omicron news, OPEC had communicated that its own forecasts showed the world’s oil balance turning to a surplus in the first quarter of 2022. Paul Sheldon, chief geopolitical adviser at S&P Global Platts, said his organization’s own market metrics indicate that a pause in OPEC’s production increases would make sense in the first quarter simply because the first few months of the year tend to be a seasonally weak period for demand.

A source of gnawing uncertainty for nearly everybody else, the Omicron variant might have made oil ministers’ jobs easier—at least for the moment.

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