Bigger-Than-Expected Drawdown Fuels Crude Oil Rally
Crude oil futures were stronger on Wednesday, fueled by better-than-expected inventories data. Buyers pushed the market closer to $50 a barrel in reaction to the news, putting the market at its highest level in over seven months.
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Prices were also supported on Tuesday and earlier today by a huge rally in U.S. equity markets and a stronger-than-expected new home sales report that could encourage the U.S. Federal Reserve to raise interest rates as early as June.
July West Texas Intermediate Crude Oil was up 56 cents a barrel at $49.18. Internationally-favored Brent Crude Oil rose 47 cents to $49.08 per barrel.
According to the American Petroleum Institute, U.S. crude oil stocks dropped by 5.137 million barrels to 536.8 million the week-ending May 20. Traders were looking for a drawdown of 3.300 million barrels.
Traders said a portion of the drawdown was due to falling imports caused by the wildfires in Canada, which lost about 1.5 million barrels per day in production. The strengthening economy may have also contributed to increased oil consumption.
Gasoline stocks rose by 3.6 million barrels, while inventories of distillate fuels, including diesel and heating oil, fell by 2.9 million barrels, the API data showed.
On Wednesday, investors expect to see another huge draw when the U.S. Energy Information Administration reports its official inventory figures.
Traders also warned that although a move to or over $50 per barrel may look attractive on the charts, there is still a danger of topping out at this level because of the global supply glut. Additionally, the longer the market lingers near the $50 level, the greater the chance of increased output from U.S. producers. Last week’s rig count was unchanged, which indicates producers may have stopped shutting down rigs. An increase in the number of producing rigs this week will send a bearish signal.
Traders also said that much of the recent price surge can be blamed on the outages in Canada and the supply disruptions in Nigeria. These are being perceived as short-term events and that the supply glut is big enough to stop any rally and lead to renewed selling pressure.
Another factor that could slow down the rally or even trigger a fresh break is the stronger U.S. Dollar. If economic data continues to improve then this may encourage the Fed to raise rates in June. This would make the dollar a more attractive investment that could put pressure on dollar-denominated commodities like crude oil.