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Oil edges lower as investors weigh demand risk from omicron

© Shutterstock / Brian McDonaldShell PowerNap development

Oil edged lower amid nervousness around the rapid spread of the omicron virus variant and strength in the dollar.

Brent reversed earlier gains to trade 0.2% lower. West Texas Intermediate, which didn’t trade Friday due to a US holiday, fell. An advance in the dollar reduced the appeal of commodities like oil that are priced in the currency.

The volume of daily US infections with omicron has now surpassed those in the delta wave, while China posted the highest number of cases since January. Still, Brent’s near-term market structure signaled an improved outlook.

Traders were also monitoring a planned 100,000 kiloliter, or around 630,000-barrel, crude sale from Japan’s strategic reserves. The move is part of Tokyo’s plans to sell oil in coordination with other nations and more sales may follow as energy markets are monitored, according to a trade ministry official.

Crude’s rally from the depths of the pandemic has run into considerable headwinds in the last couple of months as investors sized up the challenge to demand posed by omicron. At the same time, the Organization of Petroleum Exporting Countries and its allies have kept boosting supplies, and the US has led the coordinated release of oil from national strategic reserves.

Among disruptions from omicron, airlines have been canceling some services due to crew shortages, threatening a nascent rebound in jet fuel usage. Anthony Fauci, President Joe Biden’s top medical adviser, said Americans should stay vigilant against the new strain, despite evidence its symptoms may be less severe, because the volume of cases can still overwhelm hospitals.

“Even if omicron is less virulent, it appears its contagiousness has the potential to disrupt the flow of goods and services as workers isolate,” said Jeffrey Halley, senior market analyst for Oanda Asia Pacific Pte. That would imply lower levels of oil consumption, he said.

Brent for February settlement fell 0.2% to $75.97 on the ICE Futures Europe exchange at 2:22 p.m. in Singapore.

WTI for February dropped 1.2% to $72.90 a barrel on the New York Mercantile Exchange.

Brent’s prompt timespread – the gap between the nearest contract and the next in sequence – has returned to a bullish pattern in recent days after flipping briefly into the bearish contango structure. The spread was 36 cents a barrel in backwardation on Monday, from 5 cents in contango a week ago.

Traders, meanwhile, will be keeping tabs on talks due later Monday over a possible revival of Iran’s nuclear accord that could pave the way for a resumption of official crude flows. The European Union said negotiators needed to speed up efforts to resolve a standoff between Tehran and Washington.

Heading into the Christmas weekend, Russian Deputy Prime Minister Alexander Novak said worldwide oil demand would continue to recover as consumption was growing despite the pandemic. Countries have learned to live with the virus, thanks in part to active vaccination programs, he told Rossiya 24 TV.

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