Oil prices bounce back on tight inventories, demand worries limit gains

Oil rebounded from a weak start on Tuesday as worries over tight inventories underpinned prices, although optimism was limited by fears over demand following a pickup in COVID-19 cases in Europe.

Brent futures added 96 cents, or 1.2%, to $83.01 a barrel, as of 0712 GMT, while U.S. West Texas Intermediate (WTI) crude climbed 80 cents, or 1%, to $81.68 a barrel.

"At these oil prices, supply is going to grow but it might take six months and inventories have come down so low. We don't have a safety margin," said Tony Nunan, a Tokyo-based senior risk manager at Mitsubishi Corp.

"We have very low inventory levels and if we have a very cold winter and OPEC is still sluggish at increasing supplies that could push oil prices up."

Global oil markets remain very tight and heavily backwardated as demand returns to pre-pandemic levels, Trafigura's Chief Executive Officer Jeremy Weir said.

"We are seeing a very, very tight oil market but it's not artificially tight because of what OPEC is doing. Demand is there," Weir said at the FT Commodities Asia Summit.

Russian crude grades sold in Asia fetched the highest spot premiums in 22 months for cargoes loading in January, extending gains for a fourth straight month as robust demand and firm refining margins support prices, trade sources said on Tuesday.

Still, worries about demand destruction due to the COVID-19 pandemic weighed.

Europe has again become the epicentre of the COVID-19 pandemic, prompting some governments to consider re-imposing lockdowns, while China is battling the spread of its biggest outbreak caused by the Delta variant.

The Organization of the Petroleum Exporting Countries (OPEC) last week cut its world oil demand forecast for the fourth quarter by 330,000 barrels per day (bpd) from last month's forecast, as high energy prices hampered economic recovery from the COVID-19 pandemic.

Fears of declining demand come as supplies are expected to rise.

Last week, U.S. energy firms added oil and natural gas rigs for a third week in a row, encouraged by a 65% increase in U.S. crude prices so far this year. [RIG/U]

U.S. shale production in December is expected to reach pre-pandemic levels of 8.68 million barrels a day, according to Rystad Energy.

Money managers raised their net long U.S. crude futures and options positions in the week to Nov. 9, the U.S. Commodity Futures Trading Commission (CFTC) said on Monday.

The speculator group raised its futures and options position in New York and London by 11,328 contracts to 353,807 during the period.

(Reporting by Naveen Thukral and Roslan Khasawneh; Additional reporting by Florence Tan; Editing by Kenneth Maxwell)