Oil Prices Rally Amid Geopolitical Risks and Inventory Concerns

Oil Prices Rebound

Oil prices have been rallying off three-year lows, bouncing back from overnight weakness following an unexpected crude build reported by the American Petroleum Institute (API). This rebound comes ahead of the Federal Open Market Committee (FOMC) decision and is further boosted by geopolitical risk premium, which has been reignited following Israel's pager-op on Hezbollah, sparking retaliation threats.

Concerns Over US Demand

Robert Yawger, director of the energy futures division at Mizuho Securities USA, expressed concerns about US demand. He suggested that weak preliminary inventory data from API and recent trends in product spreads are contributing to these worries. Yawger stated that if the product is not needed, there is no need for the crude oil to produce the product, emphasizing that this is the most crucial calculation in the energy industry.

Crude Stockpile Data

The key question is whether the official US crude stockpile data will confirm API's findings. The API reported a crude of +1.96MM (expected -0.5MM), Cushing -1.4MM, gasoline +2.34MM, and distillates +2.3MM. On the other hand, the Department of Energy (DOE) reported crude -1.63MM (expected -0.5MM), Cushing -1.979MM (the biggest draw since January), gasoline +69k, and distillates +125k. This official data contradicts the API, with a 1.63mm barrel draw. Cushing's stockpiles saw a significant drop of 1.979mm barrels, the largest draw since January.

Impact on WTI

The significant draw at Cushing pushed stockpiles near 'tank bottoms', and the Biden administration added 655k barrels to the Strategic Petroleum Reserve (SPR) last week. US Crude production dipped to 132.mm barrels, and WTI bounced back above $71 ahead of the official data. Despite this, crude remains considerably lower year-to-date, reflecting China’s bleak demand outlook and OPEC+'s plans to restore some shuttered output. These headwinds have been partially offset by supply disruptions in Libya and the US, and prospects for monetary easing, with investors expecting the Federal Reserve to start lowering interest rates.

Geopolitical Risks

Geopolitical risks in the Middle East have also influenced oil prices. Iran-backed Hezbollah accused Israel of orchestrating an attack in Lebanon involving the explosion of pagers, resulting in several deaths and thousands of injuries. This incident has raised fears of a full-scale war in the region, bolstering prices on Tuesday. However, on the demand side, weak consumption has led some European refineries to reduce processing rates. In China, the world's largest oil-importing nation, poor margins have resulted in the bankruptcy of two small plants.

Bottom Line

Oil prices are showing signs of recovery amid geopolitical risks and concerns over inventory levels. The market is closely watching the official US crude stockpile data and geopolitical developments in the Middle East. However, the demand side remains weak, with some refineries reducing processing rates and poor margins leading to plant bankruptcies in China. What are your thoughts on these developments? Share your views and discuss this article with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.