By Barani Krishnan

Investing.com – The New Year rally in oil showed no signs of slowing on Wednesday as those long the market added another 2% to crude prices after the previous day’s 4% climb. 

According to U.S. government data however, there was clearly a decline in gasoline demand as winter slowed down driving and increased the amount of fuel needed for autos. Employers’ plans to return workers into their offices were delayed by the Omicron version of Covid, which caused a drop in commuting as well as other fuel-related travel.

According to Wednesday’s Energy Information Administration, gasoline prices jumped 7.96 million barrels over the past week. That is more than double forecasts of 2.41million. The latest build added to the previous week’s rise of 10.13-million barrels, which already accounted for the largest weekly surge in gasoline stocks since the height of the coronavirus crisis in April 2020. EIA shows gasoline inventories have increased by almost 30,000,000 barrels in the last six weeks.

The inventories of oil distillates which can be used to make diesel for cars, trucks and buses as well as jet fuel, grew more than anticipated for the second week. They climbed by 2.54 million barrels against 1.76 million. Distillate stocks increased by 4.42 Million barrels in the week before.

“It’s quite perplexing to see these sorts of fuel stockpiles, which we haven’t had for nearly two years since the worst of the coronavirus pandemic,” said John Kilduff, founding partner at New York-based energy hedge fund Again Capital. “It shows that refiners are still turning out gasoline like anything although it’s already winter, with fewer people driving, especially with Omicron cases on the rise.”

The number of US coronavirus-related hospitalizations has reached an all time high. Data from Wednesday showed that the Omicron strain is still less deadly than the COVID-19 original strain. 

U.S.   on their own saw a stockpile drop of 4.6 million barrels last week, on top of the previous week’s drop of 2.1 million. Over the last six weeks, crude stockpiles fell by approximately 23 million barrels. This is partly responsible for current gasoline and distillates levels in the market.

The benchmark for U.S. crude settled  Wednesday’s trade up $1.42, or 1.8%, at $82.92 per barrel. Following Tuesday’s near 4% gain, WTI is up almost 5% week-to-date and has risen nearly 16% over the past four weeks.

Oil benchmark London-traded closed up 1.1% to $84.67 a barrel, and settled at 95 cents. Brent rose more than 3% this week. The past four weeks have seen a net gain around 14%.

“The macro shorts in oil may be throwing in the towel in the past few days,” analyst Adam Button said in a comment posted on the ForexLive site.  “The rally in oil yesterday and today came on no-news and that’s evidence of a squeeze on positioning.”

Button also said he worried about “a sustained drop in Chinese demand due to Omicron”. 

“Much of the world has learned to carry on alongside the virus but more than 20 million people in China are currently in a hard lockdown,” he said. “I expect that number to grow in the coming weeks and that’s something that could severely hurt physical demand. From where I stand, that’s enough reason to sell oil and return to the sidelines near $85 in WTI.”

Kilduff stated that it was obvious that the bull market had gripped oil markets to the extent that demand for fuel components was being ignored while long-term focus was on raising crude prices to $90 per barrel or more.

“As is the case, when the fall comes, it’ll be as hard or harder than the rally, especially if the demand isn’t backed up quickly enough by hard numbers to the projections made,” Kilduff said.

Sam Boughedda also reports on this matter.