Large US stock draws push oil higher, but concerns about rate hikes persist

Oil prices experienced a slight increase on Wednesday after industry data revealed a larger-than-anticipated decline in U.S. inventories, signaling strong demand from the world’s largest oil consumer. However, concerns over interest rate hikes limited the gains.

Brent crude futures rose by 0.71 percent to $72.77 a barrel, while U.S. West Texas Intermediate (WTI) futures gained 0.74 percent to reach $68.20 a barrel.

In the previous session, both contracts had fallen by approximately 2.5 percent due to indications that central banks may continue raising interest rates.

“Tuesday’s slump brought Brent and WTI close to support levels that have held in previous price declines. The floor is being tested again, but whether it holds remains to be seen,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.

Brent’s six-month spread, which refers to a price structure where sooner-loading contracts trade above later-loading ones, was at its lowest point in six months.

However, the two-month spread showed the opposite price position, known as contango.

“A widening contango at the prompt end and a weakening backwardation along the Brent and WTI forward curves indicates an increasing market perception of oversupply,” explained Hari.

According to market sources citing data from the American Petroleum Institute, crude stocks fell by approximately 2.4 million barrels in the week ended June 23. This exceeded analysts’ expectations of a 1.76 million barrel drawdown. U.S. government data on stockpiles is set to be released on Wednesday.

In addition, gasoline inventories saw a decline of around 2.9 million barrels, in contrast to estimates of a drawdown of 126,000 barrels.

On the demand side, European Central Bank President Christine Lagarde stated that persistently high inflation would require the bank to continue avoiding rate hikes. The prospect of higher interest rates can impact economic activity and oil demand.

Market concerns over the Federal Reserve’s potential need to raise interest rates were fueled by a rise in U.S. consumer confidence in June.

Market analysts believe that fears of higher interest rates affecting global growth and oil demand have been difficult to shake off. However, they anticipate that the market will tighten in the second half of 2023 due to Saudi supply cuts starting in July, with the possibility of prices rising from their current levels, according to research from National Australia Bank.

Russia’s energy ministry separately announced that there is no shortage of gasoline in the domestic market as companies have reduced exports and increased production following planned maintenance work.

Diesel fuel production at the end of June was 2 percent higher than in the same period last year, and stocks are currently at a historical high, added the energy ministry.

In China, annual profits at industrial firms continued to decline at a double-digit rate during the first five months of the year, as softening demand squeezed margins. This further supports hopes for additional policy support to bolster the country’s post-COVID economic recovery.