Crude Climbs on Strength of Surprising But "Not Critical" Stockpile Draw

Today's saber-rattling between U.S. and Iran is all but ignored by traders. File Image / Pixabay

Despite contentions that it isn't significant to overall inventory, a massive drop in U.S. stockpiles calmed fears of oversupply and caused crude prices to surge upward on Wednesday, with West Texas Intermediate rising 78 cents to $69.30 and Brent climbing 49 cents to $73.93 per barrel.

Defying expectations that stockpiles would decrease by 2.3 million barrels, the Energy Information Administration reported that crude inventories fell by 6.1 million barrels in the week to July 20, their lowest since February 2015.

However, the draws occurred mainly on the west coast, and John Kilduff, founding partner of Again Capital, pointed out that "The west coast is so isolated from the rest of the county that it's just not seen as critical to the overall inventory setup," and he added that China has recently been making purchases of Canadian crude, which is often sent to the west.

Still, in an analytical community as schizophrenic as that of oil and gas, "The decrease puts the focus once again on tightening supplies here in the U.S. and it also puts the focus on the fact that U.S. gasoline demand is going through the roof," said Phil Flynn, senior market analyst at Price Futures Group.

While it's unsurprising that unexpected news would sway the sentiments of experts from one day to the next, a bird's eye view of global activity shows that nothing much has really changed to warrant a shift to concern over tightening supplies, especially from Russia's perspective: on Wednesday Alexander Novak, energy minister for that country, said oil production in the former Soviet Union will increase to 551 million tonnes, or 11.02 million barrels per day (bpd), a 30-year high and up by 3.5 million tonnes from previous expectations.

He added that Russia will further raise production to 555 million tonnes in 2019.

Interestingly, as in past sessions, the market did not respond to what had up until recently been a source of major worry for traders: the conflict between U.S. and Iran, which on Wednesday took the form of yet more flowery sabre-rattling, this time by Major General Mohammad Ali Jafari, who declared, "If the current capabilities of the Revolutionary Guards ... reaches the ears of the adventure-seeking president of America, he will never make this kind of mistake and will reach the understanding that an oil threat can be easily answered."

Presumably traders failed to decode what this actually meant, and indeed Jahari did not specify how Iran might react to U.S. threats to its oil exports.

But the trading community acted with equal indifference to a more clearly-stated threat from Bahram Qassemi, foreign ministry spokesman for Iran, who said, "If America wants to take a serious step in this direction it will definitely be met with a reaction and equal countermeasures from Iran."

Earlier this week, those who are convinced crude prices are heading downward due to the ability of so many countries to easily boost output were supported by Russia's Rosneft, which announced that it is basing its budget on an oil price of $63.