Oil Rises As Demand, Output Cuts Will Soon Cause Supply Deficits: Analysts

Geopolitical concerns were still strong enough for oil prices on Wednesday to log another round of gains, but an unexpected build in U.S. inventories capped the upward trajectory.

Brent settled up 43 cents to $89.35 per barrel, and West Texas Intermediate settled up 28 cents to $85.43 per barrel after the Energy Information Administration reported that U.S. crude stockpiles increased by 3.2 million barrels last week.

Wednesday's session was also marked by a meeting of the Organization of Petroleum Exporting Countries (OPEC), whose ministers met analytical expectations by keeping their output policy unchanged; they also pressed some members to better comply with the cuts and told media Russia would switch to output instead of exporting curbs.

This caused Giovanni Staunovo, analyst at UBS, to remark, "If those compensation cuts get implemented, and Russia switches their export cuts to crude cuts, OPEC+ production should trend lower in the second quarter - a period when demand seasonally picks up."

For its part, Bank of America theorized that improving economic growth expectations should push the oil market into a 450,000 barrel per day (bpd) deficit in the second and third quarters of this year, with Brent averaging $86 per barrel compared with earlier estimates of $80 per barrel.

Bloomberg stated that bullishness is showing up beyond front-month futures prices, with oil options traders increasingly looking to protect against rising prices: "Brent's second-month options skew has flipped from its usual put skew — favoured by producers seeking to protect against price drops — to a bias toward calls; that comes as timespreads move further into backwardation, another indicator of strength."

This matched BoA's statement that "Low inventories across the oil complex, OPEC+ output cuts, geopolitical tensions, and robust economic growth figures have flipped price trends and now point to a tighter-than-expected summer driving season, supporting firm backwardation in crude and products."