Oil prices experienced a notable surge on Wednesday, reaching their highest intraday levels for the year. Both Brent and U.S. West Texas Intermediate (WTI) crude registered substantial gains, propelled by a combination of factors, including data revealing an unexpected drop in U.S. crude inventories and supply constraints stemming from the Organization of the Petroleum Exporting Countries (OPEC)+ production reductions.
Brent crude futures made an impressive ascent of over $2, cresting at $96.51 per barrel. Concurrently, U.S. West Texas Intermediate (WTI) crude futures exhibited a notable climb of $3.16, ultimately settling at $93.54 per barrel. These figures provided a measure of relief to markets that had been apprehensive about dwindling supplies, particularly in the wake of OPEC+’s extension of their voluntary production cuts, totaling 1.3 million barrels per day, until year-end.
According to a recent Reuters poll, U.S. crude stocks recorded a decline of 2.2 million barrels over the past week, a stark contrast to the projected decrease of 320,000 barrels. Notably, the Cushing storage hub in Oklahoma, pivotal as the delivery point for U.S. crude futures, saw its stockpile diminish by 943,000 barrels, culminating in a total of just under 22 million barrels. This level marks the lowest since July 2022, an observation echoed by Dennis Kissler, Senior Vice President of Trading at BOK Financial, who remarked, “The big news was the storage in Cushing.” He emphasized, “The biggest concern for traders is Cushing getting near multi month, operational lows. That’s a bullish force for crude prices.”
However, Kissler tempered this optimism with a note of caution, highlighting that the market had entered into an overbought state, warranting a course correction. The reduction in Cushing stockpiles could potentially exacerbate supply challenges during the winter season, posing the risk of pushing oil levels below minimum operational thresholds.
This predicament is further complicated by the tightening of grey fuel exports, referring to the procurement of oil products for domestic use, which are subsequently exported, following a restriction on gasoline and diesel exports imposed by the Russian government.
While concerns about dwindling supplies persist, the impact of global supply constraints may be offset to some extent by an increase in interest rates. Elevated interest rates serve to temper demand by elevating borrowing costs and decelerating economic expansion. The surge in oil prices occurred shortly after Neel Kashkari, President of the Minneapolis Federal Reserve Bank, indicated that the U.S. Central Bank might not have concluded its course of interest rate hikes.
In summary, Wednesday’s surge in oil prices was fueled by a combination of factors including unexpected reductions in U.S. crude stocks and supply constraints from OPEC+ production cuts. Both Brent and WTI crude futures attained their highest levels for the year, though market observers have sounded a note of caution regarding the potential need for a corrective adjustment. The current circumstances raise apprehensions regarding global supply constraints and the potential disruption to oil flow at the Cushing hub over the winter months, yet the impact could be mitigated in part by the rise in U.S. interest rates.