Oil prices experienced on Wednesday, marking a significant milestone for both Brent and U.S. West Texas Intermediate (WTI) crude as they reached their highest intraday points for the year. This surge in oil prices came on the heels of the release of crucial data indicating a larger-than-expected drop in U.S. crude inventories, attributed largely to supply constraints resulting from the ongoing production cuts enforced by the Organization of the Petroleum Exporting Countries (OPEC)+.
Brent crude futures experienced a remarkable ascent, surging over $2 to an impressive $96.51 per barrel. Simultaneously, U.S. West Texas Intermediate (WTI) crude futures witnessed a substantial increase of $3.16, settling at a notable $93.54 per barrel. This unexpected surge in oil prices offered a much-needed respite to markets plagued by concerns over tightening supplies, following OPEC+’s decision to extend their voluntary production cuts of 1.3 million barrels per day until the end of the year.
The revelation of a substantial drop in U.S. crude stocks served as a pivotal moment in the oil market. According to a Reuters poll, U.S. crude stocks plummeted by a staggering 2.2 million barrels during the previous week, a sharp deviation from the anticipated drop of 320,000 barrels. Furthermore, the storage hub in Cushing, Oklahoma, which serves as the delivery point for U.S. crude futures, experienced a significant decline of 943,000 barrels, bringing the total inventory to just under 22 million barrels. This marked the lowest level recorded since July 2022.
Dennis Kissler, the Senior Vice President of Trading at BOK Financial, highlighted the significance of the drop in Cushing’s storage, stating, “The big news was the storage in Cushing. The biggest concern for traders is Cushing getting near multi-month, operational lows. That’s a bullish force for crude prices.” However, Kissler also cautioned that the market appeared to be overbought, suggesting that a correction might be imminent.
While the decrease in Cushing’s stockpiles may exacerbate supply concerns as winter approaches, potentially pushing oil levels below minimum operating thresholds, another factor adding to the uncertainty is the tightening of grey fuel exports. This refers to the practice of purchasing oil products for domestic use and subsequently exporting them instead. The Russian government’s recent ban on gasoline and diesel exports further compounds these supply constraints.
Amid ongoing concerns about dwindling supplies, one potential mitigating factor on the horizon is the impact of higher interest rates. Such rates have the potential to curb demand by raising borrowing costs and slowing down economic growth. This development comes in the wake of comments by Neel Kashkari, the President of the Minneapolis Federal Reserve Bank, who hinted that the U.S. Central Bank may not have completed its cycle of interest rate hikes.
In summary, Wednesday witnessed a remarkable surge in oil prices driven by the unexpected fall in U.S. crude stocks and exacerbated by concerns regarding supply tightness amid the ongoing OPEC+ production cuts. While both Brent and WTI crude futures reached their highest levels of the year, market experts have sounded a note of caution, warning that the market may be overextended and in need of a correction. The current situation has heightened worries about global supply constraints, particularly the potential disruption in oil flow at the critical Cushing hub during the winter season. However, the impact of these constraints may be moderated to some extent by the prospect of rising U.S. interest rates.
Source: Reuters
