Crude Oil Remains Volatile Amid Concerns Over Omicron and US Falling Inventory

Crude oil price dropped 1.27% to close at $81.50 on Thursday after a consecutive two-day bull run. Wednesday’s US crude oil stockpiles release favoured the bullish bias with the US inventory falling to the lowest level since October 2018. The US stockpiles have dropped for a seventh consecutive week and the overall global supply is tightening as major producers struggle to increase supply. Meanwhile, in other parts of the world including Libya and Kazakhstan, the political situation is further threatening the disruption in supply. The possibility of a weaker supply and hopes on global economic recovery after the pandemic has kept the oil price steady from 2 December low of $62.46.

However, renewed concerns on the rapid spread of COVID19’s new variant Omicron and the expected rise in global interest rates are increasing the likelihood of weakening demand. According to the latest estimates, COVID19 has infected 305 million people worldwide and the newly discovered variant is even more contagious. This could lead to a new phase of travel restrictions and lockdowns and dampen the global economic recovery. Analysts also believe the rising crude oil price will drive higher inflation and this will negatively impact FED’s policy of hiking interest rates to curb inflation.

Given this bleak fundamental analysis, OPEC+ is a major player. So far it is continuing its monthly supply increase but also taking a cautious approach. So far the oil market has started 2022 with several factors that could make for another volatile year. As of now, with all the contributing factors the price is likely to remain below $85 until there is some more certainty.

On the technical side, yesterday’s decline seems like a regular pullback that can be extended towards $78 in the coming days. In the longer run, the next major support level is at $73.78 and only a strong pullback below this level would cause a further decline towards $68.55 and $65 support levels. Keeping in mind the previous sharp recovery from Fibo 38.2% ($65.51) on 2 December the commodity is unlikely to move towards that level again during the first quarter. On the upside, a possible double top formation is present around $85 and it may help the bears to stop the advancing bulls.

From a weekly point of view, the crude oil is likely to remain range-bound between $83 and $78.