Crude Oil Futures
Fundamental Analysis

Oil Recovers on Surprise Crude Inventory Draw

  • In the last week, oil has lost nearly 7% of its value.
  • The IEA and OPEC lowered their forecasts for global oil demand.
  • US data revealed that import prices fell sharply in September.

Oil rebounded on Thursday due to an unexpected draw in crude inventories. However, prices ended near a two-week low on Wednesday as downward pressure from demand concerns and easing Middle East tensions persisted. China’s weak economic performance has led to a downgrade in the global oil outlook. Meanwhile, the calm between Israel and Iran has removed the premium on oil.

Oil futures (Source: ICE, Nymex)

In the last week, oil has lost nearly 7% of its value due to two significant catalysts. The first is demand concerns due to China’s weak economy. Notably, the International Energy Agency and OPEC lowered their forecasts for global oil demand. The main reason for the downgrade was China’s fragile economy. Oil imports to China, the largest consumer, dropped in September. 

Furthermore, although top officials have announced stimulus measures, experts believe the economy needs more support. The disappointment in the markets has weighed on prices. Nevertheless, investors are awaiting more details on Beijing’s stimulus measures, including support for the real estate sector. 

The second catalyst is the easing tensions in the Middle East. Oil prices rallied when Iran made a bold attack on Israel. Markets were expecting retaliation which would likely lead to supply disruptions. Experts believed Israel would attack Iranian oil. However, there was calm after the attack when Israel said it would not attack Iranian oil. Still, there is uncertainty over its future plans.

Meanwhile, there was support for prices after US data revealed that import prices fell sharply in September. Lower import prices translate to lower inflation, pushing the Fed to cut interest rates. A drop in borrowing costs spurs economic growth, increasing demand for oil.

On Thursday, oil recovered after data showed that crude inventories fell by 1.58 million barrels last week. Meanwhile, economists had expected a 1.8 million barrel increase. The draw is a sign that demand was high. 

The focus on Thursday is on the US retail sales report. According to forecasts, sales might increase by 0.3% in September after increasing by 0.1% in August. An unexpected jump will show a healthy economy with robust demand. However, it will increase the likelihood of a Fed pause in November, hurting oil. On the other hand, poor figures would raise the likelihood of a November rate cut, supporting oil.