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Oil extended gains on optimism that the omicron virus variant may not be as severe as feared, easing concern over the demand outlook.

Futures in New York advanced beyond $71 and those in London topped $75 as equity markets rallied. Initial data shows that the surge in omicron cases hasn’t overwhelmed hospitals so far, but some nations have still implemented restrictions on travel that’s expected to crimp jet fuel demand. 

In China, oil imports rose to a three-month high in November after refiners were allocated new quotas, according to government data. Overall exports also hit a record as external demand surged ahead of the year-end holidays.

Oil’s plunge in recent weeks was seen by some analysts as driven by low liquidity and so-called negative gamma effects, where options traders are forced to sell futures contracts to hedge their risk. When prices rise, like they have in recent days, those traders often buy back the futures they sold, further fueling the rebound. 

While crude slumped into a bear market last week, prices have been steadily strengthening since then as the demand hit from omicron has so far been limited. Citigroup Inc. said on Tuesday it is bullish prices in the short-term and Saudi Arabia’s move on Sunday to increase the cost of its crude for January gave the market confidence that the consumption outlook would remain robust.

“Oil prices are continuing the recovery," said Carsten Fritsch, an analyst at Commerzbank AG. “The most serious concerns about the omicron variant of coronavirus, which had triggered the price slide, have evaporated for the time being."

While Citi said the oil market should recover from its recent losses, it painted a more bearish picture for the longer-term outlook. It expects prices at the back of the curve to weaken, as OPEC nations look to pump more and non-OPEC supply remains readily available between $50 and $60. 

Omicron has prompted France to shut nightclubs for four weeks, while New York City called for a private sector vaccine mandate and Hong Kong imposed quarantine requirements on more countries. Energy Aspects cut its forecasts for jet fuel and oil demand following curbs on air travel.

More stories like this are available on bloomberg.com

©2021 Bloomberg L.P.

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