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Oil Industry Becoming a Surplus Territory

The energy sector has defied the wider market selloff in the new year, with Oil and gas companies accounting for seven of the top eight gainers on the S&P 500 on Tuesday, thanks in part to rising geopolitical concerns. After dropping 2.2 percent on Monday, WTI crude for March delivery rose 2.8 percent to $85.60/bbl, while March Brent crude rose 2.2 percent to $88.20/bbl.

The current rise in Oil prices has been fueled by two key factors: broad trader worry over limited spare capacity and demand optimism based on the belief that the Omicron wave is dissipating and will not stifle demand growth.To wit, the latest wave of Covid in South Africa, which began in late November 2021, is already decreasing as fast as it previously surged, and is expected to be proclaimed over soon across the country.

Omicron was discovered in South Africa for the first time. The effect of geopolitics has been magnified by concerns about spare capacity, making the market extremely sensitive to anything that could be regarded as a supply threat. That sensitivity has been demonstrated in the last week in response to drone attacks against UAE targets and increasing tensions between Russia and Ukraine.However, a sector of Wall Street is now warning that the Oil market may have already shifted into surplus zone.

Standard Chartered has issued an enthusiastic note on base metals in its latest weekly commodity market analysis, stating that supply cuts, deficits, and low stocks will enhance base metals in 2022. Unfortunately, analysts are less optimistic about the Oil market’s prospects, claiming that the markets may have already entered a surplus in January. On January 18, the US Energy Information Administration (EIA) released its most recent Drilling Productivity Report (DPR).

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