Oil holds near two-month high

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Oil steadied near a two-month high as demand withstands the omicron variant and supplies come under pressure, tightening global markets.

West Texas Intermediate held above $82 a barrel after US crude stockpiles dropped, adding to an increasingly tight supply picture caused by outages and constraints from Libya and Nigeria to Russia. Consumption has proved remarkably resilient as the new virus strain delivers only a limited setback, the International Energy Agency said. 

Since 2022 began, WTI has surged almost 10%, joining other commodities in a strong start to the year, on signals that consumption outside Asia is largely recovering 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. This comes as crude stockpiles sank to the lowest level since 2018, according to a government report. 

Analysts warn that the low level of stockpiles could make the crude market vulnerable to price spikes in the short-term, said Ed Moya, Oanda’s senior market analyst for the Americas. “With strong growth in the US and abroad, the oil market is going to remain fairly tight as demand will continue to outpace supply,” 

Nonetheless, 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 in China, which is battling an omicron outbreak, efforts at containment are inflicting mounting economic damage.

WTI for February delivery fell 36 cents to $82.28 a barrel at 10:32 a.m. in New York. Brent for March settlement declined 37 cents to $84.30.

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 $6.46 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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