Oil Up as the Omicron Hit to Global Demand Fears Ease

Oil trekked higher as global supplies are on track to be tighter than previously expected amid easing fears over the omicron variant’s hit to global demand.

Futures in New York rose 1.2% while Brent crude settled at $80 a barrel for the first time since late November as OPEC+ stuck to its plan to lift output. Benchmark West Texas Intermediate crude reached a session high that was the strongest since November 26. 

With demand largely withstanding the omicron variant, the OPEC+ producer group on Tuesday approved a 400,000 barrel-a-day increase in production scheduled for February. Its analysts on Monday cut estimates for a surplus in the first quarter, predicting weaker supply growth from rivals.

“Prices are heading higher after OPEC+ showed they are more confident that the global crude demand outlook will only take a limited hit, said Ed Moya, Oanda’s senior market analyst for the Americas. It appears geopolitical risks such as from Russia-Ukraine tensions, and the lengthy Iran nuclear deal revival talks are also supportive of higher oil prices, he added.

The overall supply-demand backdrop is looking better for OPEC+. The group’s production increases are likely to be less than the agreed levels as some members struggle. Russia failed to raise output last month while production in OPEC member Libya is expected to fall again this week. The market structure remains in a bullish backwardation pattern, which indicates continued supply tightness. 

“The biggest challenge is starting to be to actually implement the theoretical rise in production as more and more producers start to struggle,” said Hans van Cleef, senior energy economist at ABN Amro.

Omicron’s spread isn’t reducing oil demand, given the low level of hospitalizations, Russia’s Deputy Prime Minister Alexander Novak said in an interview with state Rossiya 24 TV.

Brent should stay in the $80-a-barrel range for a while, unless risk appetite deteriorates or if the stock market sells off, said Oanda’s Moya. WTI will likely consolidate around the $77 level, he added.

Prices:

  • West Texas Intermediate rose 91 cents to settle at $76.99 a barrel in New York
  • Brent for March settlement gained $1.02 to $80 a barrel

The OPEC+ Joint Technical Committee, which analyzes the market on behalf of ministers, sees a surplus of 1.4 million barrels a day in the first three months of 2022, about 25% less than it estimated a month ago, according to a report seen by Bloomberg.

Meanwhile, the industry-funded American Petroleum Institute will be issuing its estimates for domestic oil inventories later Tuesday. The U.S. government will be releasing its own report Wednesday.

(with assistance from Sharon Cho and Alex Longley)


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