WTI holds above $71.00 as traders weigh up surging gas prices against Omicron concerns

• WTI is ranging to the north of the $71.00 level in subdued Tuesday trade, $5.0 up fom Monday’s lows.
• Record high European nat gas prices and bullish inventory data are likely helping, but Omicron concerns continue to lurk.

Since recovering back to the north of the $71.00 level on Tuesday, front-month WTI futures have been heading sideways within a $71.00-$71.70ish range. For now, the key psychological level and 21-day moving average at $71.09 are acting as support, though if this level was to go, the door would be open to a swift drop back towards $70.00. The crude oil bulls will likely be pleased with how well oil markets were able to recover from Monday’s lows just above $66.00.

Surging natural gas prices in Europe is likely lending some support. Prices there have been hitting fresh record highs this week amid fears of Russia withholding gas deliveries amid political tensions with NATO over Ukraine. There has been a significant build-up of Russian troops on the Ukrainian border as Russia demands no more Eastwards NATO expansions and no more deployment of offensive weapons close to its border. Given European dependence on Russian gas imports, it is not surprising to see Russia flexing this leverage in order to hurt the European economy. Reports over the last few days suggest that industry across the EU has been affected by the surge in prices, with many factories halting production as a result of high energy costs.

With regards to how this relates to crude oil markets, higher gas prices incentivises power producers to substitute in comparatively cheaper crude oil, increasing its demand, thus boosting oil prices. Tuesday also saw the release of the weekly US API crude oil inventory report which saw a much larger drawdown on stocks than expected of 3.67M versus forecasts for 2.6M. The bullish report is for now likely helping to keep WTI supported above $71.00, though oil traders will be looking ahead to the release of official weekly US inventory data at 1530GMT for confirmation.

In the meantime, news of fresh international travel restrictions isn’t helpful to sentiment is likely to stand in the way of further gains from Monday’s lows, with focus on Singapore halting quarantine-free travel and freezing all new airplane ticket sales for flights and buses until 20 January amid Omicron risks. These travel restriction comes as nations across Europe consider or move ahead with fresh restrictions to curb Omicron transmission, with South Korea also imposing fresh measures. Analysts have pointed out that markets look increasingly to be entering “holiday mode” ahead of Christmas day celebrations across the Christian world on Saturday and New Year celebrations next week. For oil markets, that might mean conditions are more rangebound than usual amid lower than normal liquidity.