Oil Up As U.S. Inventory Draws Exacerbate High Demand/Low Supply

But Woodside and the EIA both see oil prices coming off their highs: File Image/Pixabay

More stockpile drawdowns in the U.S. stoked market tightness fears on Wednesday and resulted in more price gains for crude – and analysts noted that with demand in China growing due to a relaxation of Covid lockdowns, the upward trajectory will likely continue.

After the Energy Information Administration reported that inventories at Cushing, Oklahoma, fell 1.59 million barrels last week, West Texas Intermediate rose $2.70 to settle at $122.11 per barrel; Brent gained $3.01 to settle at $123.58 per barrel.

Tony Headrick, energy market analyst at CHS Hedging, said, "The gasoline draw is a highlight of the report with a tight market place across the U.S.," and he added that demand remains strong even with prices at the pump in many states exceeding $5 per gallon.

Few if any analysts think the current situation is sustainable: Meg O'Neill, CEO of Woodside, told  Bloomberg television on Wednesday that she expects oil prices to come off their highs:  "But obviously the near-term factors are continuing to be tight, supply is continuing to be tight, and one of the things that's going to challenge the industry is that we've been under investing for the past few years."

Suhail Al-Mazrouei, energy minister for the United Arab Emirates, pointed out that, "If we continue consuming, with the pace of consumption we have we are nowhere near the peak because China is not back yet."

Al-Mazrouei echoed O'Neill's sentiments by warning that without more investment across the globe, the Organization of Petroleum Exporting Countries (OPEC) will not able to guarantee sufficient supplies of oil: "We're lagging by almost 2.6 million barrels per day (bpd), and that's a lot."

Also of concern to analysts was Iran on Wednesday removing two surveillance cameras of the International Atomic Energy Agency from one of its nuclear facilities, a move that will presumably raise tensions at the United Nations nuclear watchdog and could cause problems in reaching a nuclear deal with the U.S. – a deal that could lift sanction and add a badly-needed 1 million bpd of supply to the world market.

Still, the general consensus is that the short-term pain caused by the tight market will eventually segue into a more rational balance: The EIA noted that "We expect the Brent price will average $108 per barrel in the second half of 2022 and then fall to $97 per barrel in 2023."