This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.
Oil prices surged to new six-month highs in mid-week trading, as an unexpected drawdown in US commercial crude inventories combined with concerns over supply disruptions in Canada’s oil sands region.
The West Texas Intermediate (WTI) benchmark for US crude futures spiked above $46 a barrel on Wednesday to reach its highest level since early November. Brent crude was up over 4% in mid-week trading to settle around $47.43 a barrel. The international benchmark still has a way to go before knocking out 2016 highs above $48 a barrel.
Oil prices received a boost on Wednesday after the US Energy Information Administration (EIA) said commercial crude inventories declined by 3.4 million barrels last week, confounding expectations for an increase of over 700,000 barrels. The reading marked the first drawdown in six weeks, easing concerns of a worsening supply glut in the world market.
The American Petroleum Institute had reported a weekly build of 3.5 million barrels prior to the official figures being released.
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More than 1.5 million barrels per day of Canadian crude remain offline as an ongoing wildfire in the province of Alberta has forced a shutdown of oil sands production. The wildfire has grown to 229,000 hectares, but local authorities believe they are slowly beginning to contain it. This are raising hopes that production could ramp up soon. Alberta Premier Rachel Notley confirmed that the oil sands facilities north of Fort McMurray were not damaged by the fire.
Crude prices have continued to defy dismal economic data from China, the world’s biggest energy consumer. China’s exports declined 1.8% annually in April, while imports also plunged at a double-digit percentage pace, the General Administration of Customs reported on Sunday. As a result, Beijing’s trade surplus widened to $45.56 billion from $29.86 billion.
However, analysts expect crude prices to face renewed pressure in the short-term as Iran ramps up efforts to reclaim market share. Tehran recently announced that it will lower its official selling prices (OSPs) for heavier crude to its biggest discount to Saudi Arabian oil since 2007-08.
For its part, Saudi Aramco – the kingdom’s state-run oil company – is increasing its production this year, according to a recent report by the BBC. This comes despite Saudi Arabia’s recently announced Vision 2030 plan to wean the kingdom off oil. The Saudi government announced a major government shake-up over the weekend, including replacing veteran oil minister Ali al-Naimi. The 80-year old al-Naimi was replaced by Khaled al-Falih, who previously served as the head of the Saudi health ministry.