Oil Prices Rally on Surprise US Inventory Drop and Chinese Stimulus Signals


Oil prices surged, reaching near a one-month peak, propelled by a substantial decline in US inventories, surpassing expectations. West Texas Intermediate (WTI) surpassed $75 a barrel, marking its highest level since December 26th in intraday trading, while Brent rose above $80. The unexpected drop in US inventories, exceeding 9 million barrels last week—six times more than anticipated—pushed stockpiles to their lowest levels since October.

Simultaneously, China announced plans to reduce the reserve-requirement ratio for banks within the next two weeks, hinting at potential additional support measures. This move from China, the world's largest crude importer, contributed to a positive outlook for energy consumption.

Despite these developments, the oil market has grappled with a narrow trading range in recent weeks. Geopolitical tensions in the Red Sea have disrupted global trade, but concerns persist about robust crude supply growth from non-OPEC producers. Notably, recent US navy interventions in the Red Sea, intercepting attacks on container ships by Iran-backed Houthi rebels in Yemen, underscore the heightened risks in the Middle East.

Charu Chanana, a market strategist at Saxo Capital Markets Pte., noted that while the unexpected drop in US inventories might be attributed to recent abnormal weather disruptions, the continuous offsetting by non-OPEC supply indicates potential range-bound oil prices until there is greater clarity on the global growth outlook.

The oil market has been on edge due to various tensions in the Middle East, including the prolonged Hamas-Israel conflict and increased activities by Iran, both directly and through proxies in Iraq and Pakistan. Citigroup Inc. warned of the possibility of Brent prices surging to $90 a barrel if these tensions escalate, although the bank emphasized that this is not its base-case outlook.

The current market conditions are reflected in the WTI's prompt spread, which has widened to 12 cents a barrel in backwardation—a bullish structure. This compares with 7 cents in contango, the opposite pattern, observed just two weeks ago.

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