Explainer: Why oil recovers gain 2% after three declining days
A larger-than-expected weekly decline in US crude stockpiles and a weaker US currency overcame hints of slower Chinese economic growth as oil prices rose by almost 2% on Wednesday. By 1:33 p.m. EDT (1733 GMT), Brent futures had increased by $1.35, or 1.6%, to $85.08 per barrel, while US West Texas Intermediate (WTI) crude had increased by $2.09, or 2.6%, to $82.85.
WTI dropped at its lowest since June 21 and Brent closed at its lowest since June 14. The difference between Brent and WTI’s premium shrank to about $3.65 per barrel, the lowest since October 2023. Energy companies have less incentive to send ships to the US to pick up petroleum for export as a result of the narrowing spread.
According to the US Energy Information Administration, for the week ending July 12, oil companies removed 4.9 million barrels of crude from storage. This contrasts with a loss of 4.4 million barrels in a report from the American Petroleum Institute trade group and the 30,000 barrel decline analysts predicted in a Reuters poll.
The diesel and 321-crack spreads, which gauge refining profit margins, dropped to their lowest points since December 2021 and January 2024, respectively, according to US refining news.
Following the dollar’s 17-week low versus a basket of major currencies, the US dollar (.DXY), opens new tab, declined, which further supported oil prices.
A declining dollar can increase the demand for oil by lowering the price of goods denominated in other currencies that are valued in dollars, such as oil.
According to official figures released earlier this week, China, the world’s largest oil importer, saw its economy grow 4.7% in the second quarter of 2023—the slowest growth since the first quarter of 2023—which restrained the rise in crude prices. Data from recent times have indicated a slowdown in growth in China, the euro region, and the United States. The time when central banks will be able to seriously lower interest rates is drawing near.
Due to rising mortgage rates, single-family homebuilding in the US reached an eight-month low in June, indicating that the housing market was probably a drag on the country’s second-quarter economic growth. Leading US Federal Reserve members set the scene for the first decrease in borrowing costs in September by stating on Wednesday that the central bank is “closer” to cutting interest rates given the improved trajectory of inflation and a better-balanced job market.
In 2022 and 2023, the Fed raised rates significantly in an effort to curb a spike in inflation. Consumer and company borrowing costs increased, which hindered economic growth and decreased the need for oil. Lower interest rates may increase the market for oil.
Earlier this week, what happened to oil?
Tuesday’s decrease in oil prices was more than 1%, marking the third day in a row. The declines were somewhat offset by growing speculation that the US Federal Reserve may start reducing its benchmark interest rate as early as September due to concerns about a weakening Chinese economy stifling demand. Brent futures ended the day at $83.73 a barrel, down $1.12, or 1.3%, while West Texas Intermediate (WTI) crude in the United States dropped $1.15, or 1.4%, to $80.76.
A lot of China’s refineries are reducing their output of weaker fuel, and the country’s ongoing government support initiatives have been met with disappointment and weaker economic indicators. According to official figures, the second-largest economy in the world grew by 4.7% in April–June, which is the lowest growth rate since the first quarter of 2023 and less than the 5.1% predicted in a Reuters poll. Due to a prolonged real estate slowdown and job instability, it shrank from the 5.3% expansion of the previous quarter.
Meanwhile, the global economy is set for modest growth over the next two years amid cooling activity in the US, a bottoming-out in Europe and stronger consumption and exports for China, but risks to the path abound, the International Monetary Fund said on Tuesday.
Crude oil stockpiles in the United States decreased by 4.4 million barrels last week, according to data released by the American Petroleum Institute on Tuesday, which was cited by market sources. A Reuters survey on Tuesday indicated that 33,000 barrels of losses in stocks were anticipated on average last week.
The three US inflation readings from the second quarter of this year, according to Fed Chair Jerome Powell, “add somewhat to confidence” that the rate of price increases is gradually reverting to the central bank’s objective. The remarks were seen by market players as a hint that interest rate reductions might not be far off.
Significance of new data
US oil inventories fell by -4.870 million barrels, compared to expectations for a smaller decline of -3.443 million barrels in the week ending July 12, according to data issued Wednesday by the US Energy Information Administration.
But US gasoline inventories rose by 3.328 million barrels, compared to an expected decrease of -1.600 million barrels in the same period. Inventories of oil derivatives and products added 3.454 million barrels, compared to expectations that indicated a decline of 833 thousand barrels.
US Cushing warehouse inventories decreased by 875 thousand barrels in the week ending July 12, compared to the decline recorded the previous week at 702 thousand barrels. The capacity utilization rate of US oil refineries improved somewhat to -1.7% compared to the reading recorded in the previous week at -1.9%.
Last Updated on 5 months by News Desk 2
