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Vitol's Muller says OPEC+ likely to be cautious as it assesses new variant

Highlights

OPEC+ concerned about potential surplus, oil demand growth

Oil price crash on Nov. 26 triggered by illiquid market, fear of Omicron

Gas to oil switching may accelerate

An OPEC+ committee set to meet on Dec. 2 is likely to take a cautious approach in light of the new South African COVID-19 variant which adds to their concerns about demand growth and a possible oil surplus, the head of Vitol Asia said on Nov. 28.

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The Joint Ministerial Monitoring Committee, which will meet virtually ahead of the OPEC+ meeting also set for Dec. 2, will have very preliminary information about the new variant Omicron, Mike Muller told a Gulf Intelligence webinar. The ministerial and technical group meetings were pushed back to the new dates, sources told S&P Global Platts.

"I'm not sure they are going to react with an about turn quite as quickly as this unless more information [about the new variant] comes to light," Muller said. "Will they err on the side of caution also? I think they might and that seems to be the consensus out there. They seem a lot more concerned about demand concerns, about economic shocks, about question marks about economic growth in China and about stats from India."

OPEC+ ministers, led by Saudi Arabia and Russia, are meeting after Dated Brent nosedived 11% on Nov. 26, sending shock waves into the energy market as news of the Omicron variant outbreak led to bans on flights from South Africa.

US-led SPR releases

Fears over new lockdowns due to the new variant triggered the oil price crash. S&P Global Platts assessed Dated Brent at $73.27/b, the lowest in two months, after details of a new variant of the virus emerged.

The meeting also coincides with a US-led coordinated release of Strategic Petroleum Reserves by various consuming countries that was intended to tame high prices at US gas stations. US President Joe Biden has blamed OPEC for the high oil and gas prices that have impacted drivers in the world's biggest crude consumer.

"This week, we launched a major effort to moderate the price of oil — an effort that will span the globe in its reach and ultimately reach your corner gas station," Biden said on Twitter on Nov. 27. "It will take time, but before long you should see the price of gas drop where you fill up your tank."

The Nov. 26 oil price crash was triggered by an illiquid market during US Thanksgiving holidays and fears of the unknown impact of the variant rather than the SPR release, Muller said.

Global inventories

"I think in a world without Omicron, we were looking at an ever-tightening supply picture where the world needed OPEC to put extra volume into the market," he said. "If they don't and this turns out to be a false alarm, a false scare....and this virus doesn't turn out to be of concern to energy demand, then the market needs ongoing supply."

Oil market inventories are still low and OPEC+ spare capacity is concentrated in the hands of a few core members, he added.

"Global inventories are below pre-pandemic levels and investment hasn't been as such in the global upstream, including shale, the fastest to respond sector, to allow a response if global demand were to see a resurgence early next year," Muller said.

A colder-than-expected winter and switching from gas to oil in power generation may also impact OPEC+ decision-making, he added.

"Of course, the oil switching, into what was gas demand, is in place, if anything it may accelerate," he said.