- The Energy and Information Administration reported that crude inventories fell by a massive 12.2 million barrels last week.
- Business activity in the US services sector fell to a 4-month low.
- There was an unexpected increase in OPEC output in June.
Oil prices rose nearly 1% on Wednesday after a bigger-than-expected decline in crude inventories, indicating robust demand. At the same time, weak data from the US raised the likelihood of a Fed cut in September, which would increase fuel consumption.
Oil and crude inventories (Source: Nymex, EIA)
The Energy and Information Administration reported that crude inventories fell by a massive 12.2 million barrels last week, much bigger than the forecast of 680,000 barrels. The enormous drop came from a surge in exports and a rebound in refinery runs. However, the global picture of inventories remains concerning.
Oil received more support from the US, where downbeat data increased expectations for a rate cut. At the same time, a weak dollar made oil cheaper for overseas buyers, increasing demand. Business activity in the US services sector fell to a 4-month low. The ISM services PMI dropped from 53.8 to 48.8 in June, indicating softness that could pave the way for rate cuts.
Moreover, employment figures showed a drop in demand as private jobs increased by a smaller-than-expected number. Meanwhile, unemployment claims rose. Dark clouds are gathering over the US economy, which might prompt the Fed to lower borrowing costs.
Notably, the US economy has remained mostly resilient despite high interest rates. However, the longer borrowing costs stay high, the weaker the economy gets. As this happens, demand for oil drops. To reverse this, the US central bank must start cutting interest rates, which would boost fuel consumption.
However, market participants are still awaiting the report on nonfarm payrolls. This will give a clear picture of the most resilient sector in the economy. Oil will rally if employment misses forecasts because it would increase the chances of a rate cut in September. However, if employment beats estimates, prices will decline.
Elsewhere, investors were worried about supply due to a storm that could hit the Gulf of Mexico. The heavy rains could tighten supply, boosting oil prices.
Meanwhile, there was downward pressure on oil due to an increase in OPEC output in June. For a second month, OPEC supplied more than planned. Supplies from Nigeria and Iran were notably bigger than their pledged cuts.
