Oil prices shrug off Omicron to reach two-month high

© Reuters. FILE PHOTO: The sun sets behind an oil pump outside Saint-Fiacre, near Paris, France September 17, 2019. REUTERS/Christian Hartmann/File Photo

By Shadia Nasralla and Noah Browning

LONDON (Reuters) - Oil prices hit two-month highs on Wednesday on tight supply and easing concerns about the potential hit to demand from the Omicron coronavirus variant.

U.S. Federal Reserve Chairman Jerome Powell on Tuesday said that the economy of the United States, the world's biggest oil consumer, should weather the current COVID-19 surge with only "short-lived" impact and is ready for the start of tighter monetary policy.

Brent crude futures were up 47 cents, or 0.6%, at $84.19 a barrel by 1430 GMT. U.S. West Texas Intermediate (WTI) crude futures were up 66 cents, or 0.8%, at $81.88.

Equities, which often move in tandem with oil prices, also ticked up, while a weaker dollar also lent support. A weaker greenback makes dollar-denominated oil contracts cheaper for holders of other currencies, [MKTS/GLOB]

The Brent contract is showing growing backwardation, with front-month delivery around $4.20 more expensive than delivery in six months, indicating tight near-term supply.

OPEC+ oil producers continue to hold back more than 3 million barrels per day (bpd) in output while Iranian exports are pinned back by continuing U.S. sanctions.

Though OPEC+ producers are raising output targets each month, technical difficulties have prevented several countries from hitting their quotas.

"Assuming China doesn’t suffer a sharp slowdown, that Omicron actually becomes Omi-gone, and with OPEC+’s ability to raise production clearly limited, I see no reason why Brent crude cannot move towards $100 in Q1, possibly sooner," said Oanda analyst Jeffrey Halley.

"There are plenty of variable outcomes in the previous sentence, the biggest threat being Omicron in China, India and Indonesia."

Meanwhile, European jet fuel refining margins are back to pre-pandemic levels as supplies in the region tighten and global aviation activity recovers.

U.S. crude stocks fell by 1.1 million barrels in the week ended Jan. 7, market sources said, citing figures from the American Petroleum Institute (API).

Government figures are due on Wednesday. [EIA/S]

On Tuesday the U.S. Energy Information Administration upgraded its oil demand outlook, forecasting that U.S. demand will rise by 840,000 bpd in 2022, up from a previous forecast for an increase of 700,000 bpd.