Barclays on Monday raised its average oil price forecasts by $5 per barrel for this year, aided by extremely tight inventories, shrinking spare capacity and a relatively mild effect of COVID-19 infections on demand.

"We remain constructive on oil prices... This is due primarily to a larger deficit estimate for Q4 21, leading to a lower-than-expected starting point for inventories this year and a slightly smaller surplus estimate for H1 22," the investment bank said in a note.

The bank raised its 2022 average price forecasts to $85 and $82 per barrel for Brent and West Texas Intermediate (WTI), respectively and said the risks to the price outlook were skewed to the upside, on elevated geopolitical risks amid shrinking spare capacity.

Brent crude futures were trading at about $88 a barrel on Monday, while U.S. West Texas Intermediate (WTI) crude was at $86, gaining on the back of supply fears amid tensions in Eastern Europe and the Middle East. 

Barclays said the shrinking spare capacity will increase price risk from potential supply outages, which might derive from the political instability in Libya or military escalation between Russia and Ukraine.

The impact of the surge in Omicron cases on demand has been limited so far, the bank noted and said its demand estimates for 2021 and 2022 have increased 170,000 bpd and 180,000 bpd, respectively.

"The expected surplus for H2 22 has increased slightly, but that is driven largely by a faster ramp-up in OPEC+ supplies, which should lead to a significant reduction in spare capacity and be supportive for prices, in our view."

Barclays said it expects OPEC+ to continue to increase output targets at the current pace in the coming months and raised OPEC supply forecast by 0.5 million bpd on average for 2022.

(Reporting by Rahul Paswan and Swati Verma in Bengaluru; Editing by Emelia Sithole-Matarise) ((; If within U.S. +1 646 223 8780;;))