Oil News: Hurricane and U.S. Inventory Draw Trigger Short Covering in Crude Market

Crude Oil Prices Surge on Inventory Draws and Hurricane Threat

Light crude oil futures surged over 2.5% on Wednesday as traders reacted to a significant drop in U.S. crude inventories and concerns over potential supply disruptions from Hurricane Francine. The rally comes after heavy losses on Tuesday, driven by OPEC’s downward revision of global oil demand growth. With U.S. crude stocks falling by 2.79 million barrels last week, traders covered short positions, propelling prices higher.

At 10:22 GMT, Light Crude Oil futures are trading $67.53, up $1.78 or +2.71%.

U.S. Crude Inventories Drop Further

According to the American Petroleum Institute (API), U.S. crude inventories fell by 2.79 million barrels, far exceeding analysts’ expectations of a 700,000-barrel build. Gasoline inventories also declined by 513,000 barrels, while distillates saw a slight increase of 191,000 barrels. The inventory draw signals tighter U.S. supplies, a key factor supporting the recent rally. API’s figures showed crude stockpiles have fallen by over 12 million barrels so far this year, pointing to ongoing supply-side pressures in the market.

The Strategic Petroleum Reserve (SPR), which has been used to balance the market, added 0.3 million barrels last week, now standing at 380 million barrels. Although the SPR has risen 33 million barrels since last summer, it remains substantially lower than pre-2021 levels.

Hurricane Francine Adds to Supply Concerns

Adding to bullish sentiment, about 24% of crude production and 26% of natural gas output in the U.S. Gulf of Mexico have been taken offline due to Hurricane Francine. The U.S. Bureau of Safety and Environmental Enforcement (BSEE) confirmed that key oil facilities in the region are facing potential disruptions, which could further tighten supply.

Traders are also factoring in potential extended outages if the storm intensifies. The Gulf of Mexico is a critical region for U.S. oil production, and any prolonged shutdowns could exacerbate the current supply deficit.

OPEC Downgrades Demand Forecast

OPEC recently revised its global oil demand growth forecast downward for the second time this year, signaling weaker demand in 2024 and 2025. The group now expects demand to increase by 2.03 million barrels per day (bpd) in 2024, down from 2.11 million bpd last month. Much of the downgrade is attributed to a slowing Chinese economy and the shift toward cleaner energy sources like LNG trucks and electric vehicles.

Despite the downgrade, OPEC remains optimistic about economic growth, slightly raising its global growth forecast to 3% for 2024. However, the weaker demand outlook puts pressure on OPEC+ producers, who have been implementing output cuts since late 2022 to stabilize prices.

Market Forecast: Bullish Short-Term Outlook

Given the sharp decline in U.S. crude inventories and the potential for extended disruptions from Hurricane Francine, crude oil prices are likely to remain bullish in the short term.

Traders are focused on the immediate supply tightness, which is expected to support prices, especially if Gulf of Mexico production remains offline. However, concerns over weakening global demand, particularly from China, could limit the upside in the medium term. For now, the combination of lower inventories and storm-related disruptions will likely push prices higher.

Technically, the market is trading inside yesterday’s wide range, which suggests investor indecision and impending volatility. The market hit a low of $65.27 on Tuesday, which fell inside multi-month bottoms as $66.66 and $64.45.

Despite the substantial inside move, the main trend is down. The chart pattern suggests there is just enough uncertainty in the market due to the approaching hurricane to encourage a few weak shorts to take profits and cover positions.