Oil Prices Hold Firm on Hopes Economic Growth to Support Demand

Oil prices steadied on Wednesday after rising in the previous session on expectations that fuel demand will continue to strengthen as the US Federal Reserve is likely to raise interest rates more slowly than expected. Brent and US crude oil futures are trading at their highest since the highly contagious Omicron COVID-19 variant emerged in late November has not impacted fuel demand the way previous variants did. US West Texas Intermediate (WTI) crude futures rose 16 cents, or 0.2%, to US$81.38 a barrel at 0731 GMT, adding to a 3.8% jump in the previous session. Brent crude futures were up 2 cents at US$83.74 a barrel, after jumping 3.5% in the previous session.

Federal Reserve Chairman Jerome Powell said on Tuesday the economy of the United States, the world's biggest oil consumer, should weather the current COVID-19 surge with only "short-lived" impacts and was ready for the start of tighter monetary policy. "While Powell reassured the Fed will bring down rising inflation, which strengthened the rate hike outlooks in March, he also said the Fed is capable of leaving strong economic growth intact. That may lift the demand of growth-sensitive crude oil," said Leona Liu, analyst at Singapore-based DailyFX.

Data from the American Petroleum Institute (API) industry group, however, painted a weaker picture on fuel demand, with a smaller decline in crude stockpiles than expected and bigger builds than expected in gasoline and distillate inventories. Crude stocks fell by 1.1 million barrels for the week ended Jan. 7, according to market sources citing API figures. That was less than the 1.9 million barrel draw that 10 analysts polled by Reuters had expected.

However, supporting the market was the US Energy Information Administration's upgraded oil demand outlook released on Tuesday, seeing total US demand rising by 840,000 barrels per day (bpd) in 2022 from last year, up from a previous forecast for an increase of 700,000 bpd.

"The way (Omicron) cases are rising, it does not look the situation may get better soon. However, it fails to impact financial markets and oil much as countries are not likely to resort to severe lockdowns," said Madhavi Mehta, commodity research analyst at Kotak Securities. "We are better prepared with health infrastructure as well as vaccines, so it is seen as a minor hiccup but not a major challenge."