Omicron, OMG, and Oil

December 3, 2021

Omicron.  Omicron?  Omicron!  OHMYGOD!  Oh….  oh.  omicron?

That’s effectively the range of reactions to Omicron of late as we were rudely awakened from our Thanksgiving Day food coma with the news that a COVID variant from South Africa may spread uncontrollably throughout the world. The immediate media and global reactions were as measured and level headed as an emergency fire evacuation at a clown college. Even the naming of the new variant became political theater.  Naturally the next Greek letter up was Nu, but wait . . . that’s too confusing for grippy headlines if we started writing “new Nu variant,” so what’s up next?  Xi?  As my son would say . . . awkward silence.

So Omicron it is.  Omicron we shouted. Shelter your women, your children, shelter the men, heck shelter everyone. Doors slammed shut.  In the US, Japan, Israel, and France future flights to and from places were halted (note interestingly France lifted the ban on Friday).  Thanks for letting us know about your nastiness South Africa, we’ll take it from here. Don’t call us, we’ll call you said most of the developed markets as they cancelled travel and holiday plans.

The South Africans were surely unprepared for the pariah-like treatment and left spinning by the rapidity of the closures. It’s why they quickly began backpedalling. Oh the doctor who treated the initial patients, he now says they’re doing well. Still it was too late. In politics, those who act first lead first, and leaders like to lead.

It’s easy though because it’s only Africa, we can shun that emerging market, but do that to other countries and we’d have geopolitical repercussions.  Domestically, lockdowns at home would also bring about issues.  Everyone hates lockdowns. Even the most fervent of medical professionals are tired of lockdowns.  It’s politically untenable these days in the US.  Instead, the Europeans are now pitting the vaccinated vs. the unvaccinated (i.e., locking down the unvaccinated or preparing legislation to require vaccination), but that wouldn’t work in the US, which means it’s clear . . . there will be no lockdowns. Sure we’ll bar the doors to Africa, but that’s a nothing burger economically.  Practically?  If Omicron is really so transmissible as initial reports indicated, it’s already too late since there’re already community spread cases here.

Long and short, we’re back to what we said in the second quarter.  Investors need to look at COVID today as a two sided issue.  There’s the science (i.e., are new variants more transmissible, do they increase the strain on hospitals, will it lead to higher death rates, and will our vaccines/therapies still work, etc.?).  Then there’s the politics (i.e., what are the political repercussions?).

At the beginning of the year, the scientific/epidemiological analysis outweighed the political analysis. Without widely available vaccines or therapies (or the proven ability to develop/manufacture/distribute them), sheltering in place and social isolation was really the only effective plan to reduce the strain on our health care system.  The calculus has shifted since Delta emerged.  With vaccines widely available and FREE, the global pandemic because a pandemic of the unvaccinated.  Especially as vaccination rates climbed past 40%, 50%, 60%, how you acquired antibodies in your system to combat this virus depended mostly on you (i.e., through the vaccines, or via the disease).  Respecting (even begrudgingly) everyone’s personal choice/risk tolerance became the main driver for how we’ve decided to deal with this pandemic as a society.

As we previously wrote:

In the near term, we believe that the political and social appetite for further lockdowns or restrictions has waned. The Overton Window (i.e., politically acceptable mainstream policies) has shifted. With widely available, efficacious and free COVID vaccines, the majority of the populace will begin to view COVID as a “voluntary disease” so unless new variants spike hospitalizations and deaths (they are currently not), then the world will begin to live with COVID, and focus on the nascent social and economic recovery.

To understand Omicron’s impact, we simply plug the variant into the same post-Delta analytical framework. First understand the data and then understand the politics. Yet, unlike Delta, the politics this time are much more important.  Developed markets are nearing 60% vaccinated, and emerging markets with the world’s largest populations (e.g., Brazil, Mexico, Indonesia, India, Pakistan) all have very low case counts because prior waves have largely burned through these countries that were too poor to have shelter at home.

We’ll have further clarity on the scientific front in the coming days as vaccine producers determine whether the variant can escape immunity (i.e., antibody or the longer-term T-cell/cellular immunity), but initial real world data appears to show that it does not, meaning vaccines and therapies likely will still work albeit with slightly lower efficacy rates. This would make some sense because even with a high number of variations on the Omicron spike protein, the structure appears to be largely the same.  TBH this is all still TBD. There’s plenty of information that’s pointing to the opposite end of the spectrum (i.e., higher transmissibility and higher immune escapability). If though, Omicron turns out to be more transmissible and less severe, then that actually may bode well for global immunity (i.e., those who aren’t vaccinated will be “lottery winners” and develop antibodies/cellular immunity via infection, but disease course wouldn’t be as severe).  Regardless.  Whether it’s Omicron, Pi, Rho, Sigma, etc., it should happen.  The pandemic should fade to an endemic because this is how our bodies/immune systems adapt. If our vaccine efficacies are really waning, then watch as the pharmaceutical companies roll-out boosters galore. A mutated virus could warrant an enhanced vaccine, but what’s more important is that we have the proven technology and know-how to develop, manufacture and distribute one. As for our political system?  It’s already adapted.  Freedom of choice (for all its good and bad) is where we’ve decided to make our stand, and if that’s the case, the question becomes . . . how lucky do you feel in your spot?

Oil

The next question that arises after examining the implications of Omicron is oil.  Having collapsed 15% from >$81/barrel to $70/barrel in a week, most oil investors are wondering, how low will it go? Now many oil analysts have chimed in to say that the oil sell off has been overdone.  Goldman Sachs for instance has written that the sell-off is equivalent to pricing in a scenario where Omicron would shutter the global economy at half the intensity as the Q2 2020 global lockdown, or worse off than before vaccinations.  Others have opined that it’s equivalent to building inventories by 100M barrels, when in fact inventories continue to draw these past few weeks.  For us, we don’t doubt that oil has been oversold.  Given how we’re seeing governments react to the new variant, the lack of mobility restrictions means global demand for oil (i.e., really transportation) will stay robust, especially as we head into the holidays.  Diesel to move things, and jet/gasoline to move people along, all of these products should continue to see elevated demand.

Yet on the supply side, a fall from the $80s to $70 means that producers, whether it’s private, public, or national oil companies, will all tighten their belts for capital spending in 2022, just when the world has fully recovered.  Moreover, OPEC+’s decision to increase production will add additional barrels to the market just as SPR releases occur. To mitigate a further potential price fall though, OPEC+ smartly left their December meeting “in session,” which means they can at any time come back and decide to alter their planned production hike in January. This bit of trickery should prevent bearish market participants from overly shorting oil prices for fear that OPEC+ could alter its decision. Nonetheless, all of this short-term bearishness, will inevitably create a bigger bullish aftershock.  Internationally (ex-US) we’re still down 20% in rig counts since January 2020, and in the US we’re down 30%.

Crashing prices only reduces supplies further down the road. At this stage, we’re asking how large and how long will our coming energy crisis last, as opposed to whether one will emerge.  The Omicron induced selloff simply exacerbates the bullish answer.

Patience though. Patience because this isn’t a 2018 scenario where the Saudis have sent a deluge of crude to the US as a quid pro quo, this isn’t 2019 where US production is about to ramp to all-time highs.  This is just the inevitable byproduct of how a pandemic fades to an endemic (and all the resulting uncertainties the market has to digest).  It’s a time when producers are pulling back the supply reins only a week after global consumers banded together to release STRATEGIC PETROLEUM RESERVES in a laughable effort to quell oil prices (as oil prices rose on the day they made the announcement). Stay long and keep calm because this too shall pass.  Add any other cliches you find appropriate, but the global uncertainty and miscalculations will eventually be our gain.

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