Oil prices extended gains on Tuesday with prices trading near the previous day’s one-month high on hopes that the Omicron coronavirus variant will have a limited impact on fuel demand.
Brent crude rose 7 cents, or 0.1%, to $78.67 a barrel, by 0728 GMT. U.S. West Texas Intermediate (WTI) crude rose 17 cents, or 0.2%, to $75.74 a barrel, gaining for a fifth straight session.
“Worries regarding Omicron are easing across the globe, resulting in some optimism over demand … Prices are expected to trade with positive bias,” said Abhishek Chauhan, head of commodities at Swastika Investmart Ltd.
England will not get any new COVID-19 restrictions before the end of 2021, British health minister Sajid Javid said on Monday, as the government awaits more evidence on whether the health service can cope with high infection rates.
However, the upside to prices remained limited after more than 1,300 flights were cancelled by U.S. airlines on Sunday as COVID-19 reduced the number of available crews while several cruise ships had to cancel stops.
China’s local symptomatic coronavirus cases rose for a fourth consecutive day on Monday, with Xian reporting more infections in a flare-up that has put the city’s 13 million residents under lockdown.
Oil prices have risen around 50% this year, supported by recovering demand and supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+.
“Volumes are thin because of holidays, and markets have already digested Omicron concerns. So, the focus is on the January 4 meeting of OPEC+,” Ajay Kedia, director at Kedia Commodities said.
Investors are awaiting an OPEC+ meeting on Jan. 4, at which the alliance will decide whether to go ahead with a planned 400,000 barrels-per-day production increase in February.
At its last meeting, OPEC+ stuck to its plans to boost output for January despite Omicron.
Money managers raised their net long U.S. crude futures and options positions in the week to Dec. 21, the U.S. Commodity Futures Trading Commission said on Monday.
The speculator group raised its combined futures and options position in New York and London by 4,634 contracts to 259,093 during the period.
Concerns Over Interest Rates Hike and Stronger US Dollar Weighed on Oil Prices
Oil prices dropped on the back of growing concerns over the possibility of the US Federal Reserve raising interest rates and the surge in dollar value against global counterparts.
Brent crude oil, against which Nigerian crude oil is measured, fell by $3.69 from $88.86 a barrel it peaked earlier today to $85.17 per barrel when the New York market opened. The US West Texas Intermediate crude oil shed $3.91 to $81.9 per barrel, down from $85.81 it opened during the Asian trading session.
The decline in oil prices was after the US dollar jumped to a two-week high on Monday against its global counterparts, largely due to the tension between Russia and the West over Ukraine and the likelihood of the Fed raising interest rates this week.
Francesco Pesole, a strategist at ING Bank, said the increase in dollar value could stall if the Fed signalled a preference for balance sheet reduction against the widely expected interest rate as means to tighten policy.
“If markets see the Fed willing to let balance sheet reduction do the heavy lifting, that may force a scaleback in forecasts for the number of rate hikes,” he said.
“The dollar will find more support from actual rate hike expectations than expectations of draining liquidity out of the market.”
Carsten Fritsch, an analyst at Commerzbank, explained that the crisis in both Ukraine and the Middle East “justify a risk premium on the oil price because the countries involved – Russia and the UAE – are important members of OPEC+”.
Tension in the United Arab Emirates rose on Monday following an interception of two Houthi ballistic missiles targeting the Gulf country after a deadly attack a week earlier.
Oil Extends Gain Above $86 Per Barrel Amid Tight Supply
Brent crude oil extended gains above $86.16 per barrel on Monday as global oil investors are projecting that supply will remain tight despite the surge in Libya crude oil production. The increase, they bet would be offset by restraint from top crude oil producers.
Frantic oil buying, driven by supply outages and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer, traders said.
“The bullish sentiment is continuing as (producer group) OPEC+ is not providing enough supply to meet strong global demand,” said Fujitomi Securities analyst Toshitaka Tazawa.
The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.
But many smaller producers cannot raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.
Meanwhile, Libya’s total oil output is back to 1.2 million barrels per day (bpd), according to National Oil Corp. Libyan output was about 900,000 bpd last week owing to a blockade of western oilfields.
“Libya’s oil production had dropped to a good 700,000 bpd at the start of the year, which had played its part in the price rise,” said Commerzbank analyst Carsten Fritsch.
Concerns over supply constraints outweighed the news of China’s possible oil release from reserves, said Fujitomi’s Tazawa.
Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between Jan. 31 and Feb. 6 as part of a plan coordinated by the United States to reduce global prices.
Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday that it is the prerogative of the U.S. government whether to release supply from strategic petroleum reserves.
Festering geopolitical threats to supply are also supporting bullish sentiment, analysts said.
U.S. officials voiced fears on Friday that Russia was preparing to attack Ukraine if diplomacy failed. Russia, which has amassed 100,000 troops on Ukraine’s border, released pictures of its forces on the move.
Brent Crude Oil Trading at $84.53 a Barrel
The increase in Omicron variant cases has cast doubt on demand for crude oil in the near-term and trimmed gains recorded earlier in the week on Thursday during the Asian trading session.
The brent crude oil, against which Nigerian oil is priced, pulled back from $85.16 per barrel on Wednesday to $84.53 per barrel at 9:50 am Nigerian time on Thursday.
The uncertainty surrounding the highly contagious Omicron variant and its impact on fuel demand has shown by the U.S Energy Information Administration on Wednesday dragged on the global crude oil outlook.
The data released on Wednesday revealed that gasoline stockpiles rose by 8 million barrels last week, way higher than the 2.4 million barrel increase projected by experts. Suggesting that demand for the commodity is gradually waning in response to omicron.
“Gasoline demand was weaker-than-expected and still below pre-pandemic levels, and if this becomes a trend, oil won’t be able to continue to push higher,” OANDA analyst Edward Moya stated.
However, in a note to Investors King, Craig Erlam, a senior market analyst, UK & EMEA, OANDA, expected the impact of omicron to be short-lived. Libya’s inability to ramp up production after outage and OPEC plus continuous failure to meet production target are expected to support crude oil in the main term even with Kazakhstan expected to get back to pre-disruption levels in a few days.
“With omicron seen being less of a drag on growth and demand than feared. Combine this with short supply and there may be some room to run in the rally as restrictions are removed. Of course, Covid brings unpredictability and zero-covid policies of China and some others bring plenty of downside risk for prices,” he said.
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