Oil Prices Extend Gains Amid Larger-than-Expected US Crude Inventory Drop

Oil prices continued their upward trajectory from the previous session on Thursday, buoyed by a larger-than-expected decline in U.S. crude inventories last week, signaling robust demand in the world’s largest oil consumer.

By 0630 GMT, Brent crude futures had climbed 58 cents, or 0.7%, to $85.66 a barrel, while U.S. West Texas Intermediate (WTI) crude futures rose 75 cents, or 0.9%, to $83.60 a barrel. Both contracts had settled higher on Wednesday. Latest data from the U.S. Energy Information Administration revealed that U.S. crude inventories fell by 4.9 million barrels last week, surpassing analysts’ expectations of a 30,000-barrel drop and a 4.4 million-barrel decrease reported by the American Petroleum Institute.

Priyanka Sachdeva, a senior market analyst at financial brokerage firm Phillip Nova Pte, commented, “Healthy demand signals from the United States are outweighing concerns over modest growth in China last week.” Sachdeva further noted that hopes for a Federal Reserve easing, which could boost economic growth, along with current summer travel in the United States, ensure sufficient momentum in oil demand from the world’s largest economy.

Market support also came from expectations of interest rate cuts in the coming months both in the United States and Europe. Federal Reserve officials indicated on Wednesday that the U.S. central bank was “closer” to reducing interest rates in light of an improved inflation trajectory and a better-balanced labor market, potentially paving the way for borrowing cost reductions in September.

Additionally, the U.S. economic activity expanded at a slight to modest pace from late May through early July, with businesses expecting slower growth in the future. Meanwhile, the European Central Bank is likely to keep interest rates steady on Thursday but hinted that its next move would probably be a cut.

Investors are also awaiting policy news from a key leadership meeting in China, scheduled to conclude on Thursday. The weakening dollar, which fell for the third consecutive session, could further boost oil demand by making dollar-denominated commodities like oil cheaper for holders of other currencies.

Analysts at ANZ Bank highlighted that oil prices surged – following the largest daily jump in a month – as U.S. crude inventories recorded their third consecutive weekly decline. Brent crude neared $86 a barrel after a 1.6% increase on Wednesday, while WTI crude surpassed $83.

Despite typically declining around this time of year, national inventories dropped by 4.87 million barrels last week to their lowest level since February, remaining below the five-year seasonal average.

Oil has remained high since the start of the year, supported by OPEC+ supply cuts, which have offset increased production from non-member countries. Anticipation of a more flexible monetary policy in the United States has also supported crude oil, either by boosting the appeal of riskier assets or weakening the U.S. dollar, making the commodity more attractive to most buyers.

Meanwhile, time spreads have strengthened, indicating robust near-term demand. The immediate spread for Brent, the difference between the two nearest contracts, widened to over one dollar per barrel in backwardation – when the nearest contract trades above the following one – compared to 80 cents a month ago.

Sachdeva added that futures are moving away from a series of losses as a significant correction in the U.S. dollar supports oil prices. The unexpected drop in U.S. inventories, a sign of strong demand, outweighs concerns over China’s economic growth.

As oil markets faced sharp losses last week amid weak economic readings from China, the world’s largest importer, raising concerns over slowing global demand, the latest U.S. inventory draw, significantly larger than expected, has reignited bets on tightening supply and improving demand in the world’s top fuel consumer.

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