Oil Prices Do An About Face On Massive Inventory Draw

But rate hikes could still ruin bullish sentiment, warn analysts: File Image/Pixabay.

One day after traders fretted over the prospect of high demand goading central banks into boosting interest rates, on Wednesday they responded positively to evidence in the U.S. of demand resiliency in the form of substantial inventory draws – and caused oil prices to jump by nearly 3 percent.

Brent rose $1.77, or 2.5 percent, to settle at $74.03 per barrel, while West Texas Intermediate rose $1.86, or 2.8 percent, to settle at $69.56.

According to the Energy Information Administration, crude inventories dropped by 9.6 million barrels in the week ended June 23, compared to an expected 1.8 million barrel draw and far bigger than the 2.8 million barrel draw the same time last year; the reduction also exceeded the average draw in the five years from 2018-2022.

Phil Flynn, senior market analyst at Price Futures Group Inc., remarked that the EIA numbers contradicted those who thought the market was oversupplied and speculated that, “This report could be a bottom [for oil prices]."

Matt Sallee, a portfolio manager at Tortoise, agreed, stating that “Despite a tight physical market oil had been pushed down on sentiment, but this week we are getting a logical response to physical inventories; the market might be waking up to the fact that the market is fairly tight.”

Still, on Wednesday the futures contract structure of Brent LCOc1-LCOc7 (in which contracts for earlier loading were trading below those for later loading, also known as contango) showed that oil traders’ concerns remain very much on oversupply rather than undersupply.

The same structure for WTI contract CLc1-CLc7 fell into contango for the first time since March on Tuesday.

Flynn went on to say that if anything could quash a nascent bullish trend it would be the U.S. Federal Reserve: indeed both the Fed and more recently the European Central Bank strongly suggested that they were not finished raising rates in order to combat inflation.

In other oil related news on Wednesday, in China hopes were kindled that policy support was forthcoming in the wake of annual profits at industrial firms extending a double-digit decline in the first five months thanks to weakening demand squeezing margins.

Also on Wednesday, Norway’s energy ministry approved over $18 billion of oil and gas projects; they include Aker BP’s Yggdrasil and Valhall PWP og Fenris in the North Sea, as well as Equinor’s Irpa in the Norwegian Sea.

As many as 55 wells are planned at Yggdrasil, which is said to contain about 650 million barrels of oil equivalent, making it one of the biggest developments on the Norwegian continental shelf.