Oil Prices are Surging Again as Supply Pressures Build

Crude oil is on track for its fourth gain in five days after U.S. government data showed a much larger than expected draw in commercial crude inventories last week, adding to growing evidence of supply pressures.

Oil Price Update

U.S. West Texas Intermediate (WTI) for October settlement rose $1.68, or 2.6%, yo $67.52 a barrel on the New York Mercantile Exchange. The black commodity is on track for its highest settlement in 12 days after prices plunged to multi-month lows last week. The U.S. benchmark has gained 4.5% over the past five days.

Brent crude, the international futures contract, rose $1.68, or 2.3%, to $74.31 a a barrel on London’s ICE futures exchange. Brent futures have returned 4.8% over the last five days.

Inventories Drop

The U.S. Energy Information Administration (EIA) reported Wednesday that commercial crude inventories fell by 5.836 million barrels in the week ended Aug. 18. Analysts in a median estimate had called for a decline of 1.497 million barrels. Inventories spiked by 6.805 million barrels the previous week as imports surged.

In gasoline, EIA reported a build of 1.2 million barrels and an average production of 10.2 million barrels per day.

EIA’s report corroborated separate industry data showing a large draw in inventories last week. The American Petroleum Institute (API) on Tuesday reported a decline of 5.17 million barrels. According to analysts, this may have sparked the early morning rally leading up to the EIA report.

Earlier in the week, the U.S. government announced it would sell 11 million barrels from the Strategic Petroleum Reserve to keep the market well supplied in anticipation of renewed sanctions on Iran.

Dollar Softens

The U.S. dollar’s recent struggle to hold 13-month highs has also contributed to crude’s upward momentum. The U.S. dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, declined 0.2% to 95.10, a fresh two-week low. Since peaking at 96.73 on Aug. 14, DXY has declined 1.7%.

DXY has gained 3.1% since New Year’s Day in what has been a dramatic reversal for the greenback, which got off to one of the worst starts to a year in decades.

Oil and the dollar often exhibit an inverse relationship due to the fact that futures contracts are priced in greenbacks. A decline in the value of the dollar makes oil futures more attractive for holders of other currencies.

Global trade tensions and multiple interest rate hikes on the home front are expected to keep the dollar on firm footing in the near term. Next month, the Federal Reserve is widely expected to raise interest rates for the third time this year, possibly paving the way for a fourth upward adjustment in December.

Based on Fed Fund futures prices, the likelihood of a September rate hike is currently pegged at 96%. The probability of another lift-off in December is 62.8%.

Featured image courtesy of Shutterstock. 

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi