Oil Breaks Rangebound Confines On Huge, If Fleeting, U.S. Stock Draws

A host of analysts now think market tightness will dominate 2024: File Image/Pixabay

Oil trading achieved its highest close on Wednesday since Nov. 6, based partly on the most fleeting of developments: a large draw of U.S. crude and gasoline stocks.

According to Energy Information Administration data, crude stockpiles declined by 1.5 million barrels during the week ended March 8 compared to expectations of a 1.3 million barrel build; gasoline stocks shrunk by a hefty 5.7 million barrels compared to forecasts of a 1.9 million barrel drop.

After weeks of pundits expressing demand worries, Phil Flynn, senior market analyst at Price Futures Group Inc., said, "There are growing concerns about growing tightness with a combination of seasonal maintenance and other outages."

The about-face caused Brent on Wednesday to settle up $2.11, or 2.6 percent, at $84.03 per barrel, while West Texas Intermediate settled up $2.16, or 2.8 percent, at $79.72.

Also supporting the commodity and supply fears was a second day of sustained drone attacks by
Ukraine on Russian oil refineries, causing a fire at Rosneft's biggest facility, and Andrew Lipow, president of Lipow Oil Associates, noted that "This can result in Russia exporting less diesel fuel with a potential for Russia to start importing gasoline, and that of course will affect prices around the world."

Lipow added that about 50 percent of Russia's refining capacity is vulnerable to Ukrainian drone attacks.

Although it's unclear if Wednesday's trading behaviour heralds an end to oil's long-standing range bound status, Martijn Rats, analyst at Morgan Stanley, discussed prospects of a price rally this summer, telling media that "On the supply side, we're seeing a slowdown in U.S. shale, we've seen a wobbly start in Brazil [and] we've seen a wobbly start in Canada.

"We expected inventories to build but year-to-date they are kind of flat; if in the first quarter, inventories [are] flat then they can draw possibly quite significantly during the summer period."

Amrita Sen, founder and director of research at Energy Aspects, agreed, but cited the Israel/Hamas war and Red Sea marine strikes as boosting oil: "Summer jet is ahead of us, and we think these attacks are going to go on for months so we could see some really elevated prices into the summer."

Still, forecasts of tightness due to the perception of slowing production are shaky at best: the EIA stated earlier this week that U.S. oil production will increase faster than previously expected in 2024 and help counter the extended cutbacks recently agreed to by the Organization of the Petroleum Exporting Countries (OPEC).