Oil Prices Hit Three-Month Highs as U.S. Crude Inventories Plunge
Oil prices rose sharply on Wednesday after U.S. government data showed a much bigger than expected drawdown in commercial crude inventories, signaling higher demand for the black commodity.
Crude Prices Rise
The U.S. and global energy benchmarks rallied sharply through the morning session. The U.S. West Texas Intermediate (WTI) contract rose $1.68, or 3%, to $57.18 a barrel on the New York Mercantile Exchange. The contract peaked at $57.39 a barrel, the highest level in over three months. International Brent futures rallied $1.40, or 2.2%, to $66.61 a barrel.
Markets rallied after the U.S. Energy Information Administration (EIA) reported a huge drawdown in weekly crude inventories. Commercial stockpiles fell by 8.6 million barrels in the week ended Feb. 22, confounding expectations for a 2.8 million-barrel increase. Stockpiles rose more than 3.6 million barrels during the previous week.
Trade War Truce?
The United States and China have made progress in their free trade negotiations, leading President Trump to extend the tariff truce beyond the Friday deadline. Earlier this week, Trump tweeted that he looked forward to inviting Chinese President Xi Jinping to a signing summit once a deal is finalized. Both sides remain far apart on a comprehensive agreement, though China has reportedly made key concessions on technology transfers and state subsidies.
A trade deal could alleviate some of the pressure on China’s economy and ensure foreign capital flows return to normal. In 2018, China’s economic growth slowed to its weakest point in nearly three decades as foreign direct investment fell in the first 11 months of the year. According to the United Nations, global FDI has been on the decline since 2017, right around the time that the Trump administration began targeting Chinese trade as a major policy issue.
China is a key cog in the global supply chain and the world’s biggest consumer of energy. Therefore, its ability to secure a new free trade agreement with the United States has direct implications on energy demand and the price of oil. This is especially true in the short run. Long term, demand for electric cars and renewable energy is expected to offset oil consumption. This is a major issue for exporters like Saudi Arabia, which rely heavily on the black commodity. Read more: Oil Prices and the Saudi Conundrum.
Featured image courtesy of Shutterstock. Chart via Barchart.com.