Oil prices surged about 2% on Wednesday, driven by a larger-than-anticipated decline in U.S. crude stockpiles and a weaker U.S. dollar, which outweighed concerns about slower economic growth in China. Brent futures increased by $1.35, or 1.6%, reaching $85.08 a barrel by 1:33 p.m. EDT (1733 GMT), while U.S. West Texas Intermediate (WTI) crude rose by $2.09, or 2.6%, settling at $82.85. This comes after Brent and WTI reached their lowest levels since mid-June earlier in the week.
The price difference between Brent and WTI narrowed to approximately $3.65 a barrel, the smallest gap since October 2023. This reduced premium means that energy companies have less incentive to export crude from the U.S. The Energy Information Administration reported a significant draw of 4.9 million barrels from U.S. crude storage for the week ending July 12, far exceeding analysts’ expectations of a 30,000-barrel decrease and the American Petroleum Institute’s report of a 4.4 million-barrel drop.
Refining margins in the U.S. also saw declines, with diesel and 3-2-1 crack spreads falling to their lowest levels since December 2021 and January 2024, respectively. A weaker U.S. dollar, which hit a 17-week low against major currencies, supported oil prices by making dollar-denominated commodities like oil more affordable for foreign currency holders.
In China, the world’s largest oil importer, economic growth slowed to 4.7% in the second quarter, the slowest pace since early 2023, limiting further gains in crude prices. Analysts from Citi Research noted a slowdown in economic growth in the U.S., euro area, and China, suggesting that central banks might soon have room to reduce interest rates.
In the U.S., single-family homebuilding fell to an eight-month low in June due to higher mortgage rates, indicating that the housing market likely dragged on economic growth in the second quarter. Federal Reserve officials remarked that the central bank is nearing the point where it could lower interest rates, citing improved inflation trends and a more balanced labour market. The Fed’s aggressive rate hikes in 2022 and 2023 aimed to control inflation, but also increased borrowing costs and slowed economic growth, thereby reducing oil demand. Lower interest rates could potentially boost oil demand by making borrowing cheaper for consumers and businesses.
The combination of a significant reduction in U.S. crude stockpiles and a weaker dollar provided strong support for oil prices, despite economic slowdowns in major economies like China. The potential for lower interest rates in the U.S. adds an additional layer of optimism for future oil demand.
Challenger Energy Group plc (LON:CEG) is a Caribbean and Atlantic margin focused oil and gas company, with a range of petroleum assets located onshore in Trinidad and Tobago, and Suriname, and offshore in the waters of The Bahamas and Uruguay.
