Oil Makes Strong Rebound As Supply Tightness Indicators Grow

But next week's Fed rate hike decision could prove disruptive: File Image/Pixabay

No sooner did oil traders in the previous session cause the commodity's prices to dip due to fears about unexpected inventory builds in the U.S. than they reverted on Thursday to fretting about the prospect of tighter supplies – and as a result caused  prices to climb to their highest this year.

Brent settled up $1.82, or 1.98 percent, at $93.70 per barrel, while West Texas Intermediate crude settled up $1.64, or 1.85 percent, to $90.16.

Both commodities are now technically back in overbought territory, and Dennis Kissler, senior vice president of trading at BOK Financial, noted that hedge funds have been buying crude futures for the past two or three weeks as "fundamentals continue to get stronger, driven mostly by heavy demand for both gasoline and diesel."

John Kilduff, founding partner at Again Capital, added, "The market is getting increasingly nervous about the sufficiency of supply; Russia and Saudi Arabia are acting in a way that could materially constrain supplies as we get into the peak northern hemisphere demand season, for the winter period."

Kilduff was referring to both countries recently agreeing to extend crude production cuts of 1.3 million barrels per day (bpd) to the year end.

Meanwhile, traders are anxiously waiting to see what decision the Federal Reserve will make next week regarding more interest rate hikes; data released earlier Thursday showed that American producer prices rose by more than anticipated in August, while retail sales unexpectedly edged higher.

Expectations for another rate hike were stoked by the European Central Bank on Thursday hiking interest rates by 25 basis points to a record high, the tenth straight rate increase, stating that "Inflation continues to decline but is still expected to remain too high for too long."

Another potential influence on oil trading in the near term is China: despite sentiment about the recovery of its economy post Covid being largely negative, some economic readings, especially trade and inflation, showed marginal improvements through August.

China's central bank also said it would cut the amount of cash that banks must hold as reserves for the second time this year, to boost liquidity and support the country's economic recovery.

However, there seems to be little doubt that supply tightness will be the main influence in trading habits moving forward: Ben Cahill, senior fellow at the Center for Strategic International Studies, told Bloomberg television, "The supply cuts from OPEC+ are starting to bite and it looks like we're heading for a pretty significant supply deficit — so that does mean it's bullish for prices."