(Bloomberg) — Oil fell as traders weighed the impact of the omicron wave on Asian demand, which blunted a new year rally in prices powered by lower U.S. stockpiles, positive commentary from energy agencies, and supply glitches.
West Texas Intermediate was 0.6% lower after closing Wednesday at the highest level since Nov. 9 on Wednesday. Since 2022 began WTI has still surged more than 9%, joining other commodities in a strong start to the year.
Road traffic has thinned across Asia at the start of the year as the fast-spreading omicron variant sweeps through the region. Fewer vehicles have transited most capital cities so far this month than in December, according to mobility data from Apple Inc. In China, which is battling an omicron outbreak, efforts at containment are inflicting mounting economic damage.
Crude remains higher this month on signals that consumption outside Asia is largely weathering the hit from omicron as key economies continue to recover from the pandemic. The International Energy Agency has said demand is stronger than expected, while the Energy Information Administration’s latest outlook showed that global oil inventories are set to decline this quarter.
Sentiment “remains largely constructive,” said Warren Patterson, Singapore-based head of commodities strategy at ING Groep NV after the EIA reported lower stockpiles, while cautioning the recent run-up in prices may have been exaggerated. In recent days, “supply disruptions, uncertainty over OPEC spare capacity and waning concerns over omicron have all proved bullish,” he said.
On Wednesday, the EIA reported U.S. crude stockpiles sank to the lowest level since 2018. Inventories at the key storage hub in Cushing also fell.
Underlying optimism about the outlook is reflected in the market’s bullish backwardated pricing structure, with near-term contracts holding above those further out. The spread between WTI’s two nearest December contracts — the one for 2022 and for the same month next year — was at $6.34 a barrel. That’s up from less than $5 at the end of last year.
Oil’s year-to-date surge — along with gains in other raw materials — will fan inflationary pressures as central banks shift gears to battle escalating price pressures. Federal Reserve Governor Lael Brainard said tackling inflation while sustaining an inclusive recovery is the U.S. central bank’s most pressing task.
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