- The EIA reported a decrease of 1.5 million barrels last week in crude inventories.
- The likelihood of a June rate cut remains above 60%.
- Ukraine has moved to attack oil refineries in Russia, which will likely tighten the oil supply.
Oil prices rose almost 3% on Wednesday due to a surprise draw in crude inventories. Moreover, there was a bigger-than-expected decline in US gasoline stocks, indicating robust demand and a looming tightness in the market.
US crude inventories (Source: EIA)
Notably, economists had expected a 1.3 million barrel increase in crude inventories. However, the Energy Information Administration reported a decrease of 1.5 million barrels last week. This decline came after more than a month of increases in inventories. Meanwhile, gasoline stocks recorded a 5.7 million barrel drop compared to expectations of a 1.9 million drop. This report on inventories revealed solid oil demand, boosting prices.
However, despite the recent boost in the demand outlook, concerns about China’s economy continue to weigh. China consumes a lot of oil on the global market. If the country’s economy does not recover, demand will remain subdued, hurting oil prices.
On the supply side, an escalation in the Russia-Ukraine war led to supply concerns. Notably, Ukraine has moved to attack oil refineries in Russia, which will likely tighten supply.
Additionally, investors were more optimistic that the Fed would cut rates in June despite a surprise inflation report. On Tuesday, the US released a report showing a bigger-than-expected increase in inflation. Initially, this led to fears that the Fed might further delay interest rate cuts.
Higher interest rates hurt growth, which, in turn, reduces oil consumption. Consequently, oil prices ended the day lower. However, investors have had time to digest the report, and the likelihood of a June rate cut remains above 60%. Despite the surprise figure, the general trend for US inflation is down. This means that the Fed will eventually cut rates. Moreover, Fed Chair Powell recently confirmed that the central bank will cut rates by the end of 2024. Lower interest rates are bullish for oil as they boost growth and increase demand for oil.
However, as supply tightens in Russia and the Middle East due to the ongoing wars, there are concerns about oversupply in the US. Oil prices fell on Tuesday after a higher-than-expected US oil production forecast. The EIA increased its forecast for US oil production growth by 260,000 barrels per day. This was much bigger than the previous estimate of a 170,000 barrels per day increase.
