Oil prices recovered some of the intraday losses on Wednesday, reaching a two-week high, as investors shrugged off the impact of lower fuel demand and higher US production. The market was supported by a decline in US crude inventories and signs of recovery in global demand.
US Crude Inventories Fall for Sixth Week
According to the American Petroleum Institute (API), US crude inventories fell by 1.586 million barrels in the week ending September 22, compared to last week’s large 5.25-million-barrel drop1. This was the sixth consecutive week of declines, indicating that the supply-demand balance is tightening.
The US Energy Information Administration (EIA) will release its official weekly report later today, which is expected to show a similar trend. Analysts polled by Reuters expect a draw of 2.4 million barrels2.
Global Demand Outlook Improves
The oil market also found support from the improving outlook for global oil demand, as several countries ease their Covid-19 restrictions and boost their vaccination campaigns. The International Energy Agency (IEA) said earlier this month that it expects global oil demand to rebound by 5.7 million barrels per day (bpd) this year and by another 3.2 million bpd next year3.
Some of the key oil-consuming regions, such as China, India, Europe and the US, have shown signs of recovery in recent weeks, boosting the demand for crude and refined products. For instance, China’s crude imports rose by 8% in August from a month earlier, while India’s fuel consumption increased by 11.4% in the same period4.
US Production Rises Despite Lower Rig Count
However, the oil market also faced some headwinds from the rising US oil production, which offset the output cuts by OPEC and its allies. The EIA reported on Tuesday that US crude production increased by 300,000 bpd to 11.2 million bpd in the week ending September 15, the highest level since May5.
This came despite a reduction in the number of active oil rigs in the US, which fell by four to 394 last week, according to Baker Hughes data. The rig count is an indicator of future production activity and has been declining for three weeks in a row.
Oil Prices Reach Two-Week High
Despite these challenges, oil prices managed to rally on Wednesday, reaching their highest levels since September 9. Brent crude, the international benchmark, rose by 3.4% to settle at $94.29 per barrel, while West Texas Intermediate (WTI), the US marker, gained 3.1% to close at $90.71 per barrel.
The oil market was also influenced by the strengthening of the US dollar, which rose to a one-year high against a basket of currencies on Wednesday. The dollar was boosted by the hawkish stance of the Federal Reserve, which signaled that it could start tapering its bond-buying program as soon as November and raise interest rates next year. A stronger dollar makes oil more expensive for holders of other currencies and tends to weigh on oil prices.
Oil prices rose on Wednesday despite lower fuel demand and higher US production, as investors focused on the decline in US crude inventories and the recovery in global demand. The market also reacted to the movements of the US dollar, which reached a one-year high after the Fed’s policy announcement. Oil prices are expected to remain volatile in the coming days, as traders await more data and news from major oil-producing countries.