U.S. oil prices shot up to a one-year high after another week of draining stockpiles further convinced traders that a longstanding glut may be waning.
U.S. crude storage levels have now fallen for six of the past seven weeks, the U.S. Energy Information Administration said Wednesday. Storage tanks had been filled to record highs world-wide this year, but the U.S. is just one spot where stockpiles have since retreated, a sign for bullish traders that daily supply shortages are starting to eat into that glut.
“Maybe the market is just not as bad as we thought it was,” said Scott Shelton, broker atICAP PLC.
Brent, the global benchmark, gained 99 cents, or 1.9%, to $52.67 a barrel. That is its second-highest settlement this year.
U.S. crude stockpiles fell by 5.2 million barrels in the week ended Oct. 14, an even larger drain that what an industry group had forecast Tuesday and a surprise for many analysts who had expected an addition to stockpiles. Analysts surveyed by The Wall Street Journal had forecast an addition of two million barrels, and that type of addition is more common than drawdowns are at this time of year, after the end of the summer-driving season.
The fact that U.S. stockpiles are draining at a time they usually grow is even more encouraging for bullish traders. The draw was large enough to overcome an addition to gasoline stockpiles, and the total amount of all oil and refined products in storage fell by 3.6 million barrels. That total inventory—at 1.3 billion barrels—is now down 2.4% since the end of August, the largest drop over a seven-week span since February 2014, according to EIA figures.
The oil markets were much different then, with prices still over $100 a barrel and encouraging a historic boom in oil production. Ensuing advancements in unconventional oil production led to more oil produced around the world. By year’s end the Organization of the Petroleum Exporting Countries had thrown out its output limits to help its members compete with the U.S. and other global producers.
That led to rising output and inventories, and the oversupply that many now bet has ended. The era of oversupply and prices that fell by more than two-thirds at one point led to surging demand from U.S. drivers and small Chinese refiners. Non-OPEC producers have also cut back, and stockpiles have also fallen in recent months in major hubs in Europe and Asia.
Imports into the U.S. have been falling in recent weeks and again last week. Exports—allowed less than a year ago—also keep climbing, the latest sign of increasing competition from U.S. producers. That is narrowing the discount that U.S. oil has traded at compared with Brent prices.
These major shifts in the oil market have also forced OPEC to consider an agreement on output cuts when the group’s energy ministers meet Nov. 30. With stockpiles falling and OPEC getting more serious about cutbacks, traders have become less fearful of a return to the worst of the glut and U.S. oil prices have gained more than 16% in just about three weeks, analysts said.
“Everyone is pretty loathe to sell this thing down given we don’t know what’s going to happen at the end of the month” at the OPEC meeting, said Matt Smith, director of commodity research at ClipperData, said in a note Tuesday.
Some are concerned that the decline in U.S. stockpiles will be just temporary. Many oil investors and banks, including Goldman Sachs,have described OPEC’s plan to slash production as “self-defeating” as higher prices may widen the market for U.S. shale drillers who would swoop in and essentially extend the global supply glut.
A survey of investment banks by The Wall Street Journal predicted Brent crude will average $56 a barrel next year. But some have predicted the recent declines in stockpiles suggest prices could rise above $60 in the next year.
”There is a strong possibility that global demand is already outstripping daily oil output,”Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said in a note. “Extraordinary cutbacks in global energy spending (are) starting to show up…We are seeing U.S. oil supply tighten very quickly.”