(Bloomberg) — Oil pared losses as traders weighed the rapid spread of the omicron Covid-19 variant worldwide against the biggest drop in U.S. crude stockpiles since September.
Futures in New York traded near $70 a barrel after falling as much as 1.9% earlier on Wednesday. The U.K. reported the most new daily coronavirus cases since the pandemic began, underscoring the new strain’s high rate of transmission. Total U.S. stockpiles fell 4.58 million barrels last week, a government report showed.
The stockpile data muddies the waters for traders and investors weighing conflicting signals on demand and supply. Vitol Group, the world’s largest independent oil trader, said Wednesday that prices will rise next year due to a lack of new investment in production. But the outlook for consumption appears to be deteriorating as China, the biggest importer of crude, limits holiday travel to contain the coronavirus. That’s adding to the conviction that inventories will accumulate more rapidly next year.
“Supply has finally caught up with demand and this trend is forecast to intensify heading into 2022,” said Stephen Brennock, an analyst at brokerage PVM Oil Associates Ltd. “Simply put, the oil market faces a significant oversupply next year.”
On Tuesday prompt prices for Brent, the international benchmark, briefly dipped to a discount known as contango that signals oversupply, but have since recovered.
The shift, while short-lived, is a warning to bullish investors, and not just because it reflects supply surpassing demand. If the structure returns, it also limits the returns they can get when prompt prices are at a premium, by holding a long position and collecting the yield as they roll from one month to the next.
Inventories at Cushing rose 1.29 million barrels last week, according to an Energy Information Administration report. Total U.S. stockpiles fell for a third straight week.
Much of the drop in crude came from a draw in the Gulf Coast, where exports jumped a whopping 61%. The exports-driven draw could be why markets initially discounted the bullish report, said Brian Kessens, a portfolio manager at Tortoise Capital Advisors. Yet increased exports from the U.S. signals that global crude oil demand is still strong, “even relative to the impact of the omicron variant.”
Oil’s drop this week has eaten into a partial recovery from a bear market at the end of November. The fast increase in omicron cases, which have surged to 3% of all those sequenced in the U.S. just this month, coupled with another report showing inflation running hot are likely to dampen risk appetite, which is being reflected in thinning trading volumes ahead of the year-end holiday season. Aggregated trading volumes for the U.S. benchmark on Tuesday shrank to the lowest since Nov. 24.
See also: Oil Poised to Resume Weekly Losses as Bearish Signs Mount: Chart
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