Optimism Over China Intervention, Market Tightness, Extend Oil's Gains

Traders turned a blind eye to U.S. crude buildup and impending rate hikes: File Image/Pixabay

Oil extended its gains on Tuesday, with three-month highs achieved due to a continued scrutiny of tighter supplies combined with China's attempt to fortify its economy.

As in the previous session, traders shrugged off news of tepid business activity for July in the euro zone as well as in the U.S., possibly because falling input prices and slower hiring suggests that central banks may be progressing in reducing inflation.

Still, the U.S. Federal Reserve and the European Central Bank are expected to enact 25 basis point rate hikes this week, which has the potential to end oil's rally – at least temporarily.

Brent on Tuesday settled up 90 cents at $83.64 per barrel, and West Texas Intermediate settled up 89 cents to $79.63, and Bloomberg noted that WTI's prompt spread is at 43 cents per barrel in backwardation, "the highest since November, signalling that physical markets are still parched for crude."

Phil Flynn, senior market analysts at Price Futures Group Inc., remarked, "The market is getting more concerned about the trend of tightening oil supplies, and it's becoming more obvious to the naysayers that the expected drop-off in demand isn't happening."

Flynn was referring to a host of circumstances, including a 110,000 barrel per day unit at Exxon's Baton Rouge refinery expected to be closed for up to four weeks due to a faulty gasoline-making catalytic cracker; and the expectation of further supply tightening due to output cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allies.

Meanwhile in China, positive sentiment resulted from that country's top leaders vowing to step up economic policy adjustments, focusing on expanding domestic demand, boosting confidence and preventing risks.

State new agency Xinhua quoted the Politburo as saying after a meeting chaired by president Xi Jinping, "Currently, China's economy is facing new difficulties and challenges, which mainly arise from insufficient domestic demand, difficulties in the operation of some enterprises, risks and hidden dangers in key areas, as well as a grim and complex external environment."

It added that China will implement its macro adjustments "in a precise and forceful manner."

Also on Tuesday, another sign of oil traders' new found optimism came in the form of them turning a blind eye to news from the American Petroleum Institute that U.S. crude inventories unexpectedly rose this week by 1.31 million barrels, after decreasing by 797,000 barrels in the week prior.

Analysts were expecting a 1.9 million barrel draw.