(Bloomberg) -- Oil fell as the International Energy Agency said the global oil market has returned to surplus, while some countries tightened restrictions in an effort to tame the omicron variant’s spread.
Futures in New York closed down 0.8% on Tuesday. The IEA said rebounding output has created an oversupply that’s likely to swell further next year. Italy will require travelers from other European Union countries to provide a negative Covid-19 test, and Scotland is urging no more than three households to mix.
As the market digests the near-term effects of omicron on oil demand, Brent’s so-called prompt spread flipped into contango for the first time since March, excluding contract expiration days. The bearish market structure, in which the contract for immediate delivery is trading at a discount to oil for future delivery, indicates plentiful supply over the short term.
“Omicron has the market spooked and news of new restrictions in the U.K. has led to more selling,” said Spencer Vosko, director for crude oil at Black Diamond Commodities LLC. “Brent contango is steeper in the dated market and has now appeared in futures markets, leading to a weaker sentiment.”
Oil has staged a partial recovery this month after tumbling into a bear market at the end of November due to the emergence of the new Covid-19 variant. Economic risks from the omicron strain and central banks’ efforts to rein in accelerating inflation are likely to see reduced risk appetite from traders, especially with the end of the year approaching.
New study data showed Pfizer Inc (NYSE:PFE).’s experimental Covid-19 pill was highly effective at keeping patients out of the hospital, but less adept at erasing milder symptoms often associated with breakthrough infections. In New York, Governor Kathy Hochul issued a statewide indoor mask mandate for businesses without vaccine requirements, as hospitalizations have surged 70% since Thanksgiving.
The IEA expects global oil inventories to swell early next year as supplies remain abundant with the Organization of Petroleum Exporting Countries and its allies ramping up output, some key consumers planning sales from strategic reserves, and record production from the U.S., Canada and Brazil next year. At the same time, jet fuel demand is faltering amid the new virus strain, it said in a report Tuesday.
OPEC in its own report on Monday boosted estimates for oil consumption in the first quarter by 1.1 million barrels a day, but said it still sees a surplus.
The industry-funded American Petroleum Institute reported on Tuesday that U.S. crude supplies fell 815,000 barrels last week, according to people familiar with the data. The data also showed stockpiles increased at Cushing, Oklahoma, the biggest storage hub in the U.S. The U.S. government will release its weekly inventory tally on Wednesday.
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