Crude oil prices rebounded on Thursday, gaining up to 3% and recovering from a 7% decline over the previous three trading days. Market participants anticipated the possibility of another production cut by OPEC+ at their upcoming meeting, contradicting earlier expectations for the status quo.
A key factor driving this potential decision is Saudi Arabia’s determination to combat short-selling and rapidly restore oil prices to $80 or higher. This motivation overshadowed a discouraging weekly supply-demand report on oil released by the U.S. government.
The recent surge in oil prices, despite the lackluster report, can also be attributed to the broad rally in commodity markets triggered by a sharp decline in the U.S. dollar.
The dollar experienced its largest single-day drop since mid-March following the U.S. debt ceiling agreement reached between Democratic President Joe Biden and his Republican counterpart Kevin McCarthy. Although the agreement averted a potential U.S. debt default, it left some members within their respective parties dissatisfied.
West Texas Intermediate (WTI) crude, traded in New York, closed at $70.10 per barrel, marking a nearly 3% increase of $2.01. In the previous session, it had hit a four-week low of $67.07.
Meanwhile, Brent crude, the global benchmark, settled at $74.28 per barrel, rising 2.3% or $1.68. On Wednesday, Brent had reached its lowest level in four weeks at $71.53.
The U.S. Energy Information Administration’s (EIA) Weekly Petroleum Status Report revealed a buildup of 4.5 million barrels in crude oil inventory for the week ending May 26. This surpassed market expectations, which had anticipated an average drawdown of around 1.1 million barrels for the same period.
In contrast, the prior week’s report showed a deficit of 12.5 million barrels, the largest in six months since the week ending November 25.
Regarding fuel inventories, the EIA presented mixed trends. Gasoline inventories experienced a drawdown of 0.207 million barrels, deviating from the forecasted deficit of 0.369 million barrels and the previous week’s decline of 2.053 million barrels.
Gasoline remains the primary fuel product in the United States. On the other hand, distillate stockpiles increased by 0.985 million barrels, contrary to expectations of a 0.118 million barrel drawdown, following a deficit of 0.562 million barrels in the previous week. Distillates are refined into heating oil, diesel fuel for various modes of transportation, and jet fuel.
This past week held significance for the oil market as it preceded the Memorial Day holiday, which traditionally marks the beginning of the U.S. summer travel season and typically entails higher oil demand.
However, it should be noted that the EIA’s reporting period for weekly oil supply-demand ends on Fridays, potentially leaving room for higher consumption figures in the agency’s forthcoming report.
John Kilduff, a partner at New York energy hedge fund Again Capital, remarked, “It’s the pre-OPEC ass-covering act by the oil market, if you ask me.” He further stated, “There’s nothing in this weekly EIA report that justifies the price rebound we witnessed today.
Nonetheless, it is legitimate to hedge ahead of an OPEC meeting, which is what we are witnessing now. The Saudis are still upset with oil bears for pushing prices below $70 this week, and they might consider another production cut, which they would largely shoulder.
However, it’s important to remember that if they reduce output while others don’t or don’t do as much, the Saudis risk conceding market share.”
OPEC+ comprises 13 nations led by Saudi Arabia within the Organization of the Petroleum Exporting Countries (OPEC), along with 10 other oil-producing countries steered by Russia.
Last week, Saudi Energy Minister Abdulaziz bin Salman issued a warning to short sellers in the oil market, hinting at the possibility of further cuts. However, Russian President Vladimir Putin subsequently expressed that oil prices were approaching levels that were “economically justified,” indicating that Moscow may not deem additional output reductions necessary.
Despite concerns among oil bears regarding the potential for more production cuts, OPEC+ has struggled to significantly increase crude prices over the past two months through output reductions. In April, the alliance announced a cut of 1.7 million barrels per day, in addition to a previous commitment made in October to reduce output by 2 million barrels daily.
However, after the April cut, crude prices only experienced a two-week uptick before declining for four consecutive weeks, erasing around 15% of their value. Similarly, the initial pledge to reduce output by 2 million barrels resulted in only a few days of price gains before prices plummeted to 15-month lows in March.
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