Oil prices reversed early losses on reports of the third weekly drawdown of crude stocks in the US, although analysts cautioned on waiting for further signs that Opec’s production cuts are finally tightening the market.
Inventories of US crude fell by a larger than expected 3.6m barrels in the week ended April 21, the Energy Information Administration said on Wednesday, compared with expectations for a draw of 1.14m barrels.
This marked the longest streak of back-to-back draws in crude stocks since December.
While price gains were tempered by increases in both gasoline and diesel inventories, with refineries ramping up production to a record level ahead of the summer, the drop in crude was enough to help prices recover from the month low hit in the previous session.
Brent, the international benchmark, was up 20 cents to $52.30 a barrel by 4pm London time, recovering by almost $1 a barrel from its low earlier in the day. US benchmark West Texas Intermediate rose 48 cents to $50.04 a barrel.
Prices had slipped in the morning after a US industry report had suggested crude stocks rose last week.
The US EIA inventory reports have always been a centrepiece of the week for energy traders but have come into even sharper focus in 2017 after crude stocks soared to record levels, casting doubts on Opec’s attempts to tighten the market through production cutbacks.
Brent prices dropped 7 per cent last week because of doubts that the combined 1.8m barrel a day of output curbs agreed by Opec and allies like Russia were boosting the market, with inventories remaining stubbornly high and the physical market weak.
Saxo Bank commodity analyst Ole Hansen said this week’s report from the EIA was an improvement on that situation but the drop in US crude stocks was largely driven by higher exports and refining runs.
“They’re reducing crude inventories by pushing it into refined product inventories and sending it overseas,” Mr Hansen said. “But that may not really bring the overall balance down.”
Crude has been capped well below $60 a barrel this year partly because of a strong rebound in US crude production with shale companies scrambling to deploy rigs after prices jumped at the end of last year in anticipation of Opec’s supply cuts.
Provisional numbers from the EIA on Wednesday suggested that US crude production is up to 9.27m b/d — a 327,000 b/d increase from a year ago.
US inventories are likely to grow in importance in the coming weeks. While stocks of crude generally rise in the first quarter because of seasonally weak demand, making it more difficult to assess the impact of Opec’s cutbacks, they should generally decline in the second quarter.
Failure to do so this year would likely undermine the bullish case for oil quickly.
All three major oil forecasting agencies, including the EIA, the International Energy Agency and Opec itself, forecast that the global oil market will be in deficit in the second half of this year if the cartel maintains its production cuts at its next meeting on May 25.
Khalid al Falih, Saudi Arabia’s energy minister, is expected to meet Russian counterpart Alexander Novak in the coming weeks to work out a deal to extend the curbs.