Oil rises to 2-month high as US inventory drawdown signals possible market rebalancing

Both crude futures jumped nearly three percent, with Brent’s June contract hitting $36.79 per barrel and WTI settling at $34.40 a barrel. Crude prices have been advancing for the fourth consecutive session this week extending last week’s gains. So far this month, US crude has gained over 80 percent, while Brent has surged around 40 percent.

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The rally comes after the Energy Information Administration (EIA) reported an oil inventory draw of five million barrels for the week ending May 15, marking the second weekly drop in US inventories. The agency also said that crude stocks at one of the largest storage hubs in the world – at Cushing, Oklahoma – fell by 5.6 million barrels, easing earlier fears that the facility is running out of space. 

“Given the level of production cuts at this point and the improving economic prospects, there’s no reason it can’t continue to climb higher,” Craig Erlam, senior market analyst at brokerage Oanda, said as cited by MarketWatch. He added that crude prices could “lose momentum” at some point, but they could climb to $37.50 and then $40 per barrel.

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Demand for the commodity is also starting to recover as countries are easing lockdowns and other coronavirus-related restrictions.

The output caps introduced by the Organization of the Petroleum Exporting Countries (OPEC), and allied oil producers led by Russia, also contributed to rebalancing the energy market. In April, the allies agreed on record production cuts to boost tumbling oil prices that saw a dramatic crash after the collapse of the previous deal. Starting on May 1, nations supporting the accord were supposed to slash output by 9.7 million barrels per day (bpd). Saudi Arabia said it would additionally cut production by one million bpd in June, while some other countries beyond the OPEC+ agreement also pledged to slash production.

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