Oil prices made slight gains on Thursday, building on the substantial surge from the previous session, following a larger-than-anticipated drop in US crude inventories. However, market activity remains volatile as traders express concerns about the potential impact of rising interest rates on economic growth.
At 09:40 ET (13:40 GMT), US crude futures saw a modest 0.2% increase, reaching $69.72 per barrel, while the Brent contract rose by 0.2% to $74.47 per barrel.
Surprising reduction in US stocks
Both benchmark crude oil prices experienced gains exceeding 3% on Wednesday after the Energy Information Administration reported a significant drawdown of US inventories, with a decline of 9.6 million barrels. This development raised the possibility of tighter supplies in the world’s largest consumer market, especially as the travel-intensive summer season gains momentum.
According to analysts at ING, “When taking into account the Strategic Petroleum Reserve releases, the decline was even more pronounced, with total US crude oil inventories falling by approximately 11 million barrels, including a 1.4 million barrel drop in SPR stocks for the week.”
Risks of interest rate hikes dampening growth
Nevertheless, the rally in oil prices was short-lived as traders refocused their attention on the potential for further interest rate hikes in major economies worldwide. Such actions could potentially hinder economic activity and subsequently reduce the demand for crude oil.
US Federal Reserve Chair Jerome Powell did not dismiss the possibility of consecutive rate hikes, a scenario that appears more likely after unexpected weekly jobless claims decline and the revision of the previous month’s annualized GDP growth rate from 1.3% to 2.0% for the last quarter.
European Central Bank President Christine Lagarde has virtually confirmed an upcoming increase in July, with the likelihood of more to follow, particularly after Germany’s consumer price index rose to 6.8% in June.
Additional pressure from China’s industrial profits decline
Adding to the market pressure, China, the world’s second-largest oil consumer, witnessed a double-digit decline in industrial profits during the first five months of the year.
Supply decline supports higher prices
On the supply side, Saudi Arabia is preparing to significantly reduce its oil output in July, further reinforcing the broader OPEC+ agreement to limit supply until 2024. Meanwhile, in the US, the number of active oil rigs decreased by six over the past week, reaching the lowest level observed since April of the previous year, standing at 546.
“The decline in drilling activity in the US should be well-received by OPEC+ members as it has the potential to enhance the effectiveness of their output policies,” added ING.
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