DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled lower Thursday as risk sentiment turned sour around the omicron variant of the coronavirus and larger-than-expected build on refined fuel stockpiles.

Deeming the post-Thanksgiving holiday selloff overdone after early signs suggest that omicron, while more transmittable appears less lethal, oil futures rallied this week through Wednesday. Yet worries over demand persist as mobility and travel restrictions continue in parts of Europe and Asia. On Tuesday, the Energy Information Administration revised lower their forecast for global oil demand for 2022 by 420,000 barrels per day (bpd) from their projection in November to 100.46 million bpd.

Risk-on sentiment across markets supported higher prices earlier in the week. Pfizer and BioNTech on Dec. 8 said a three-shot course of their COVID-19 vaccine can neutralize the new omicron variant in a laboratory test. "The relief rally in markets continued as more evidence that omicron can be tackled with vaccines emerged. Sentiment was also boosted by further falls in inventories," said ANZ Research analysts Brian Martin and Daniel Hynes in a note.

EIA data released Wednesday showed U.S. crude oil inventories fell by a smaller-than-expected 240,000 barrels (bbl) in the week ended Dec. 3 to 432.87 million bbl as strengthened refinery demand offset rising production. However, at the Cushing, Oklahoma, hub crude stocks rose 2.37 million bbl to a seven-week high 30.92 million bbl. Nationwide gasoline stocks moved 3.88 million bbl higher to 219.3 million bbl, while distillate inventories climbed 2.73 million bbl to 126.6 million bbl.

"WTI crude did not know how to react to a mixed EIA report. Several countries in Europe continue to see rising COVID-19 cases, with the UK urging work from home as the norm and Denmark on Dec. 8 stating it will re-impose a lighter version of the lockdowns it had last winter," read the ANZ Research note.

EIA in its latest Short-Term Energy Outlook projects oversupply for next year despite adjusting their expectation for world oil production down 490,000 bpd to 100.93 million bpd, with the Organization of the Petroleum Exporting Countries this month also projecting a supply surplus in early 2022. OPEC+ earlier this month agreed to move ahead with their 400,000 bpd production increase in January despite the weakening demand outlook, sticking to their July agreement of gradually unwinding production cuts instituted in April 2020, but also said they could adjust that decision if they believe demand will weaken further than projected.

Meantime, it remains unclear if resumed talks in Vienna over reviving the JCPOA will yield a deal after the United States withdrew from the agreement in 2018 under the Trump administration. The discussion is taking place through intermediaries, as Tehran has refused to talk directly with U.S. officials, while reportedly hardening its position. U.S. officials have suggested it might no longer make sense to revive the agreement since Iran has advanced its nuclear capability beyond the terms of the JCPOA, but the Biden administration is also seen as desperate for an agreement. While an agreement would lift sanctions on Iranian oil exports, adding more oil to the global market, Iran has already been selling more oil abroad including to China, as enforcement of sanctions have wavered under the Biden administration in contrast with stout enforcement during the Trump administration.

Oil production is also growing in the U.S., with the EIA on Wednesday reporting the third 100,000 bpd weekly increase in domestic oil output through Dec. 3 to average 11.7 million bpd. That's the greatest weekly production rate since the depths of U.S. lockdowns in response to the COVID-19 pandemic in April 2020. EIA projects U.S. output to average 11.8 million bpd in 2022, climbing to 12.1 million bpd in the fourth quarter.

Amid concern over slowing demand growth and rising oil production, the backwardated market structures for West Texas Intermediate and Brent crude futures continue to weaken. Commodity Futures Trading Commission shows money managers reducing long positions in the oil complex, as the bullish scenario softens.

At settlement, January WTI futures fell $1.42 to $70.94 bbl and ICE February Brent fell $1.40 to $74.42 bbl. NYMEX January ULSD futures fell 1.10 cents to $2.2503 gallon, and January RBOB futures fell 2.01 cents to $2.1284 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com