MELBOURNE (Reuters – Oil prices tumbled on Wednesday, as rising fuel inventories in the United States caused concern about a decline in demand for the largest oil user in the world. The Omicron variant also led to a large spike in COVID-19 instances.

According to the American Petroleum Institute, gasoline stockpiles increased by 7.1 millions barrels over the week ended December 31, according to a late Tuesday report. The week saw a 4.4 million-barrel increase in distillate stocks. [API/S]

Surging stockpiles that exceeded analyst expectations weakened the bullish outlook of investors during the previous session. Price climbed over 1% because market participants saw the decision by major producers to increase supply next month, as an indication of confidence that rising COVID-19 case would not impact demand long.

After hitting an $80.26 high, futures plunged 28 cents (or 0.4%) to $79.72/barrel at 0329 GMT. U.S. West Texas Intermediate oil futures plummeted 29 cents (0.4%) to $76.70/barrel.

We believe market fundamentals are weakening recently, as shown in the aggregate spread which is an indicator of the current demand-supply balance.” Barclays Amarpreet Singh, analyst at LON said this in a note.

Brent futures have seen a decline in the prevailing backwardation of crude markets. This is when crude oil prices are higher than prompt futures. It was at its highest point in November, two years ago.

On Wednesday, the Brent forwards price gap fell to $3/barrel from $6.30 Nov. 3 and has now fallen to $3/barrel on Wednesday. This is due in part because of concerns about the demand for crude oil following the Omicron surge.

Barclay’s Singh says that Omicron’s effect on oil demand is less than expected, as the Omicron’s milder effects are more apparent than first thought.

But, “there will be some effect on demand from increased restrictions on international travel and the sheer scale of the recent spread,” he wrote.

According to expectations, the Organization of the Petroleum Exporting Countries (Russia, Russia, and its allies), collectively called OPEC+ on Tuesday, agreed to increase the supply by 400,000 barrels daily in February. This follows the same policy as every other month since August.

Their decision to hold their increase in output reflected Omicron’s short-term impact on global energy demand.

Edward Moya from OANDA said, “The plan of gradually returning production can be moved forward because OPEC+ anticipates a tighter marketplace in the first quarter.”