Oil Edges Higher as Equities Rebound After Fed Doubles Taper

(Bloomberg) -- Oil eked out a gain, climbing in tandem with equities, as traders weighed the Federal Reserve’s shift to tighter monetary policy to battle inflation.

Futures in New York closed up 0.2%, reversing earlier losses of as much as 1.9% on Wednesday. The central bank said it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities, a move that was largely priced into risk assets already. 

Prices weakened earlier in the session, pressured by the spread of the omicron Covid-19 variant and constraints on travel. The U.K. reported the most new daily coronavirus cases since the pandemic began, underscoring the new strain’s high rate of transmission. That’s adding to the conviction that inventories will accumulate more rapidly next year.

“Supply has finally caught up with demand and this trend is forecast to intensify heading into 2022,” said Stephen Brennock, an analyst at brokerage PVM Oil Associates Ltd. “Simply put, the oil market faces a significant oversupply next year.”

Oil has swung between gains and losses this week as traders weigh conflicting signals on demand and supply. Vitol Group, the world’s largest independent oil trader, said Wednesday that prices will rise next year due to a lack of new investment in production. U.S. crude stockpiles fell for a third straight week. But the outlook for consumption appears to be deteriorating as China, the biggest importer of crude, limits holiday travel to contain the coronavirus. 

Crude’s drop earlier in the week has eaten into a partial recovery from a bear market at the end of November. The fast increase in omicron cases and another report showing inflation running hot are likely to dampen risk appetite, which is reflected in thinning trading volumes ahead of the year-end holiday season. Aggregated trading volumes for the U.S. benchmark on Tuesday shrank to the lowest since Nov. 24.

Meanwhile, total U.S. crude stockpiles fell 4.58 million barrels last week, according to an Energy Information Administration report. Inventories at Cushing rose 1.29 million barrels.

Much of the drop in crude supplies came from a draw on the Gulf Coast, where exports jumped a whopping 61%. The exports-driven draw could be why markets initially discounted the bullish report, said Brian Kessens, a portfolio manager at Tortoise Capital Advisors. Yet increased exports from the U.S. signals that global crude oil demand is still strong, “even relative to the impact of the omicron variant.”

See also: Oil Poised to Resume Weekly Losses as Bearish Signs Mount: Chart

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