Oil Prices Jump Amid Supply Fears and SPR Refill Plan

Oil prices surged Wednesday to their biggest one-day gain in a month as traders speculated that recent price declines may curb global supply growth, a factor seen as a key driver behind the price increase. The U.S. WTI crude oil contract touched a low of $57.46 a barrel on Oct. 16, the lowest since early May, and remained near $57 at Tuesday’s close. Phil Flynn, senior market analyst at Price Futures Group, indicated that U.S. oil producers have begun to slow production in response to recent price drops, citing a recent decline in the number of active oil rigs in the U.S. as evidence. As a result of these production-cutback expectations, the December WTI crude contract rose 2.2% on Wednesday, settling at $58.50 a barrel. According to Dow Jones Market Data, this marks the biggest one-day gain since Sept. 24. Further contributing to the price increase were additional sanctions announced by the U.S. Treasury Department on Wednesday on Russia’s two major oil companies, in an effort to pressure Russia to agree to a cease-fire with Ukraine. Flynn said the market has begun to see signs of slowing production based on “what he’s hearing on the ground” and data from the Railroad Commission of Texas. Baker Hughes Co.’s weekly data on active U.S. oil rigs showed the count was unchanged at 418 in the past week—but that figure had declined over the prior two weeks, suggesting a potential future decline in production.

Supply and Demand Outlook Analysis

Rebecca Babin, senior energy trader and managing director at CIBC Private Wealth, noted that crude traders had previously worried about oversupply on a global level, but OPEC+’s announced plans to increase production “have not come to fruition as anticipated.” She said that OPEC+’s actual production increase was almost 50% less than planned, thus “the ramp-up in crude that the market was expecting has not fully materialized.” Babin added that while prior expectations for crude demand had been rather conservative, actual consumption has been better than many anticipated. Moreover, she added that reports that the U.S. and India may reach a deal to reduce India’s purchases of Russian oil have “resurfaced,” adding to the potential for tightening global crude oil inventories. On the U.S. domestic front, the U.S. Energy Information Administration (EIA) reported Wednesday that U.S. commercial crude oil inventories unexpectedly fell by 1 million barrels. Separately, the U.S. government announced on Tuesday plans to increase purchases for the National Strategic Petroleum Reserve (SPR). Michael Lynch, president of Strategic Energy & Economic Research, said that while the U.S. crude stock draw was modest, it indicated strong demand overseas for U.S. crude and petroleum products. He suggested this could be due to continued attacks on Russian oil infrastructure in Ukraine, hindering Russian exports and therefore boosting demand for U.S. crude. The U.S. Department of Energy’s Tuesday announcement of plans to buy 1 million barrels of crude oil for the strategic petroleum reserve was not a surprise – as Trump previously made it clear he would replenish the reserve. Matt Smith, Kpler’s lead U.S. analyst, said that given the sharp drop in oil prices, this SPR buyback “equates to bottom-fishing” and is a reasonable move. He also pointed to the potential visit of Saudi Crown Prince Mohammed bin Salman to the U.S. to meet with Trump next month as “an interesting point in time.” He suggested that this may indicate Trump “is going to offer some support to oil prices via SPR purchases, thereby aiding Saudi and U.S. producers.” Babin told MarketWatch that the SPR purchase isn’t large in terms of global oil flow volumes, but the market signal and tone has shifted. She said that U.S. Energy Secretary Chris Wright seems “less focused on beating down oil prices and more focused on rebuilding support through consistent buying." However, Babin believes that looking ahead, as crude positioning is still “tilted short and geopolitical risks have resurfaced,” oil prices may maintain gains in the short term, but by year’s end, WTI crude prices will likely remain volatile in a $55 to $65 a barrel range. Babin said that to push oil prices beyond the range and significantly higher, the market may need to meet one of the following conditions: OPEC+ pauses its production increase, demand improves, geopolitical tensions affecting crude oil exports escalate, or inventory builds are lower than expected.