WTI rallies over 3.5% on the day, EIA boosts price forecasts

• WTI bulls step in despite the risks of covid spreading like wildfire.
• Supply risk remains a key driver, all eyes on OPEC+ group's effective spare capacity.

Oil trades much higher early on Tuesday with West Texas Intermediate, WTI, up over 3.5%bbls at the time of writing after a rally from $78.39nnls that reached $81.56bbls. The rally comes despite the spread of the Covid-19 omicron variant and the return of supply from Libya.

Libya has begun to normalize after a militia group agreed to resume output at the country's largest oilfield while pipeline repairs were completed. However, there have been reports that the nation's biggest export terminals are shuttered due to poor weather conditions.

As for Omricon, the World Health Organization has warned that 50% of Europeans could be infected with Covid-19 over the next two months. China has also increased lockdown measures to lower cases ahead of next month's Winter Olympics. In the US, cases have climbed to a record. However, markets are preferring to stick with the sentiment that the variant results in more mild cases. 

Elsewhere, and despite rising inventories today, the EIA boosted its price forecast for Brent crude, expecting it to average US$74.95 per barrel this year, up from its December estimate of US$70.60. WTI is forecast to average US$71.32 per barrel this year, an increase from the December estimate of US$67.87.

Nonetheless, ''supply risk remains a key driver with the OPEC+ group's effective spare capacity effectively concentrated between just a few nations, as operational risks mount following a decade of underinvestment,'' analysts at TD Securities argued.

''In the meantime, while the Omicron variant's higher transmissibility has correlated with mobility restrictions, resilient driving mobility and factory activity are providing an offset for energy demand. In this context, energy supply risks continue to rise despite the OPEC+ group's decision to raise output,'' the analysts added.

''US production is still recovering at a slow clip, with capital expenditure budgets for the new year still suggesting that capacity will also remain capped. With that said, the bar is extremely low for CTA trend followers to add to their longs across the complex.''