Oil rebounds from plunge on fears of Omicron variant

Oil rebounded from a sharp drop on speculation that recent deep losses were excessive andOPEC may decide to pause production hikes due to the abrupt reversal of fanning already-elevated volatility.

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West Texas Intermediate rallied 2.5% after it fell by more than 5% on Tuesday after a sell-off was driven by concerns about the impact of the omicron virus variant on global energy demand and prospects for a faster tapering of stimulus by the U.S. Federal Reserve. Crude oil deteriorating fundamentals reflected a weaker price structure along the curve.

The new variant has rattled investors because it may evade existing vaccines, and spur new anti-viruses curbs, especially for overseas travel. The oil market is far overshot the impact of omicron, according to a Nov. 30 note from Goldman Sachs Group Inc.

Oil has sunk into a bear market -- losing more than 20% since closing at a seven-year high in October -- as major consumers led by the U.S. released crude from strategic reserves and the omicron variant cut appetite for risk. The Organization of Petroleum Exporting Countries and its allies set supply policy on Thursday, with the focus now shifting to the reaction of producers. RBC Capital Markets saw higher odds of the group pausing output hikes.

"I expect OPEC to vigorously defend the supply balance they have worked hard to restore since last year," said Vandana Hari, founder of Vanda Insights in Singapore.

There has been a surge in oil s volatility because of a shift in prices. Recent moves include last Friday's drop one of the biggest on record, followed by a gain on Monday. The swings of the WTI have hit the highest since 2020.

The retreat was excessive and reiterating language used in other recent market commentary, despite the fact that the drop in oil prices was understandable in the context of low year-end liquidity and risk appetite.

Although oil remains a bullish structure with near-term contracts trading above later-dated ones, differentials have narrowed. The prompt spread of the oil was 38 cents a barrel, down from $1.20 a week ago.

A mixed report on the U.S. stockpiles was parsed by investors. The American Petroleum Institute reported a draw in nationwide crude inventories, but there was a gain at the key storage hub in Cushing, Oklahoma, as well as in gasoline. A government tally follows later Wednesday. A Bloomberg survey predicted a draw from crude stockpiles.

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