Oil prices fluctuate after two-day rally amid signs of tightening market

The world's biggest crude benchmarks Brent and West Texas Intermediate settled 2 per cent higher on Wednesday, driven by cooling US inflation data

A pump jack in the Permian Basin in Texas. Crude prices posted their third weekly gain last week. Reuters

Oil prices fluctuated on Thursday after a two-day rally as traders looked to consolidate their positions amid signs of tightening market and encouraging US inflation data.

Brent, the benchmark for two thirds of the world’s oil, was 0.55 per cent lower at $86.83 a barrel on Thursday at 3.05pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.49 per cent at $82.85 a barrel.

Both benchmarks are trading near their highest close since mid-November. On Wednesday, Brent settled 2 per cent higher at $87.33 per barrel at the close of trading, while WTI jumped 2.1 per cent to 83.26 a barrel.

A slight drop in crude futures on Thursday in Asian trade “signalled more a consolidation than any strong downwards momentum from profit-taking following Wednesday’s 2 per cent gains,” Vanda Insights, a Singapore-based oil market intelligence company, said in a note.

“Financial market sentiment was the main influence on the crude complex through Wednesday, with the US Energy Information Administration’s [EIA] weekly report, showing minor domestic inventory changes and no surprises on the demand front, being largely shrugged off.”

Crude inventories rose by 597,000 barrels last week, the EIA said on Wednesday. Analysts in a Reuters poll were expecting a 600,000-barrel drop. Gasoline and distillate stocks, meanwhile, drew down less than expected.

Prices were also propelled by the US administration plans to refill its Strategic Petroleum Reserve soon, to take advantage of lower oil prices, Energy Secretary Jennifer Granholm said on Wednesday.

“Oil got a boost from Energy Secretary Granholm's comment that the US wants to soon bring back the Strategic Petroleum Reserve back to pre-Ukraine war levels,” Edward Moya, senior market analyst at Oanda said.

Ms Granholm didn’t specify when or if the US would be buying at different levels than they have signalled in the past.

The biggest support for oil on Wednesday came from cooling US inflation data that cushioned the impact of the small build in US crude oil inventories.

Inflation in the US slowed again in March as the Federal Reserve's interest rates increases since March last year help to ease price pressure on households and businesses.

Data released by the Labour Department showed 0.1 per cent rise in the Consumer Price Index in March, down from a 0.4 per cent increase in February. Headline inflation slowed to 5 per cent on an annual basis last month.

March was the ninth straight month that inflation decreased in the US after peaking at 9.1 per cent in June last year, strengthening hopes that the Fed may be getting closer to ending the cycle of rate increases.

Wednesday's data “has now confirmed that the Fed doesn’t need to work as hard as they have, and the time has come to ease off on increasing the interest rate,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.

Crude prices have rebounded strongly since hitting a 15-month low in March, as fears of a global banking crisis have faded and crude inventories have fallen. The surprise move by nine Opec+ members to voluntarily cut production also helped oil to post its third weekly gain last week.

Opec+ producers said they would introduce voluntary oil production cuts of 1.16 million barrels per day from May until the end of this year, while Russia said the 500,000 bpd cut it was implementing from March to June would continue until the end of the year.

Financial market sentiment was the main influence on the crude complex through Wednesday, with the US Energy Information Administration’s weekly report, showing minor domestic inventory changes and no surprises on the demand front, being largely shrugged off

Vanda Insights

The producers said the precautionary measure was aimed at supporting the stability of the oil market.

The voluntary production cuts by Opec+ members should tighten the oil market further from May onwards and boost prices, according to latest oil report by Swiss lender UBS, which expects crude prices to rally towards the $100 per barrel mark in quarters to come.

Fatih Birol, executive director of the International Energy Agency, on Wednesday also said he expects the global oil market to tighten in the second half of 2023, which would push prices higher.

“Following the shock Opec+ cut announcement on 2 April, crude oil is trading at the highest level this year, trying to now break above its 200-day moving average — last seen in August 2022,” Japanese lender MUFG said in a research note on Thursday.

“It’s a tug-of-war of where oil prices go next. On the one hand (and one which resonates with our thesis) is the bullish narrative that supply scarcity driven by a tight market due to stern Opec+ cuts, negligible US shale output and the China reopening trade will drive prices higher.”

The small drop in oil prices on Thursday came despite positive data from China, the world’s largest crude importer.

The country’s oil imports in March surged 22.5 per cent from a year earlier to the highest for a single month since June 2020, as refiners stepped up runs in anticipation of an economic recovery, Reuters reported, citing data from China's General Administration of Customs.

Crude imports in March totalled 52.3 million tonnes, or 12.3 million bpd, compared with 10.1 million bpd of crude imported in March last year, signalling that economic activity in the world’s second-largest economy is picking up pace after the pandemic-driven slowdown last year.