Summary:

• Larger than expected drawdown in DOE inventories (-7.2M vs -3.3M exp)
• Oil benchmarks have rallied to their highest level since the end of May
• Oil.WTI now not far from the big psychological level of $50 a barrel

The weekly DOE crude oil inventory release has shown a larger drop in US stockpiles than expected with a decline of 7.2m barrels. This was a bigger drop than the -3.3m expected and also well below the -4.7m seen last time out. The last 4 weeks have all seen notable drops in this measure and there is a growing weight of evidence to suggest that the supply glut is fading.  

The headline reading for inventories has been declining for many months now after peaking around February time, but there are other sub components of the DOE report which can also impact on price. Two of these are the Cushing inventory change and the Gasoline equivalent.

The cushing reading showed a decline to -1.7M from unchanged previously which is supportive of the headline in being seen as positive for the price of oil. The gasoline equivalent however came in at -1.0m compared to an expectation of -1.8m. This is above forecast and could take the shine off an otherwise solid report. Longer termthe trend for these two is less clear and they appear to be ranging rather than in a clear donwtrend. 

 The headline inventories number declined once more today and this metric is in a clear downtrend. The gasoline and cushing equivalents however are a little more mixed and appear to have remained in a range for the past year. 

In terms of market reaction there was an immediate spike higher in Oil.WTI, with the market trading up to its highest level since May. However there has been some selling back in recent moments and whilst you can say that there has been a clear pick-up in volatility since the release the direction is not quite as certain. Given the recent rise in the price the selling could well simply be a case of profit taking, and it could well be key to see where the market settles this evening. A higher close would support further gains towards $50 a barrel but a failure to rise on what, on the face of it, is a fairly positive report could suggest the recent move higher has become a little overstretched.

 

 The initial reaction saw Oil.WTI spike to its highest level in 8 weeks. There has been a subsequent sell-off however and tonight’s closing level could be key going forward