Oil Prices Rally After Large Fall in U.S. Stockpiles

U.S. crude supplies decline by 5.9 million barrels, government reports

U.S. oil prices rallied to a two-week high Wednesday after government data showed an unexpectedly large decline in U.S. stockpiles, a rare reprieve from the flood of oil that had been flowing into storage.The U.S. Energy Information Administration said crude-oil inventories fell by 5.9 million barrels last week. Analysts surveyed by The Wall Street Journal had predicted they would rise by 600,000 barrels.Industry group American Petroleum Institute had reported a 3.6-million-barrel decline in oil supplies, sending prices up earlier in the morning.Stockpiles had grown in 11 of the last 12 weeks, deepening the global glut of crude that had sank oil prices by nearly 70% between last year’s highs and Tuesday’s close. This drawdown isn’t enough on its own to suggest a shrinking glut, but traders will be watching to see if it starts a trend, said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.“It’s substantial enough on a short-term basis to make [bearish speculators] in the market nervous,” he said.Light, sweet crude for February delivery gained $1.36, or 3.8%, to $37.50 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, gained $1.25, or 3.5%, to $37.36 a barrel on ICE Futures Europe.

 

It was the highest settlement for U.S. oil since Dec. 8 and the highest for Brent since Dec. 15. Brent had its largest percentage gain for one session since Nov. 3.Like retailers who let their inventory dwindle at year-end to lower their tax bills, Gulf Coast refiners reduced imports by a million barrels a day, driving the stockpile decline, according to Tim Evans, analyst at Citi Futures Perspective in New York. “This looks very much like the typical end-of-year storage play, with Gulf Coast refiners slashing inventories to mitigate state ad valorem taxes on year-end crude stocks,” he wrote in a note.

The rally in oil prices trickled over to the stock market. Of 80 U.S. listed oil and gas producers, all but one—a bankrupt company—rose on the day, with nearly half of the companies up more than 10%. Energy shares were the biggest gainers Wednesday in the S&P 500, up 3.8% and helped the S&P 500 on the whole gain 1.2% in late-afternoon trading.

 

While Wednesday’s rally may have been good for oil producers, many feel it may not be sustainable. Several analysts said the gains came largely in response to oil’s lengthy fall, which on Monday had pushed Brent to lows untouched since 2004 and West Texas Intermediate crude to below $34 a barrel for the first time since 2009.

 

Those lows, coupled with the draw down in stockpiles, have opened the door for the many traders who made bearish bets on oil prices to cash them out and take profits as they settle their books before the Christmas holiday and the end of the year, analysts said. Traders have to buy back contracts to close out bearish positions, and that can cause prices to rise.

“The market had become oversold technically and long-term investors are looking for reasons to accept partial profits out of bearish strategies prior to year’s end,” Jim Ritterbusch, president of energy-advisory firm Ritterbusch & Associates, said in a note.

 

Prices could retreat again quickly given concerns about coming production from Iran, and shaky economies in China, Europe and emerging markets, analysts said. That is likely to keep a recovery at bay, Copenhagen-based Global Risk Management said.

 

A recovery after a similar plunge in 2008 got help by production cuts from the Organization of the Petroleum Exporting Countries and the U.S. Federal Reserve lowering the value of the dollar through a quantitative-easing program—the exact opposite of today’s situation.

 

The prospect of continued low oil prices has led market observers to question how long some producers can survive sub-$40 oil. Some believe that large-scale production cuts are unavoidable at current prices, the only question being how long before they start to make an impact.

 

“The oil industry, be it OPEC or non-OPEC, is simply not functional at current prices, and Angola, Nigeria, Libya, Iraq and Venezuela are all struggling with poor finances,” London-based Energy Aspects said. “This will ultimately lead to sharply lower supplies, but unlikely until” the fourth quarter of 2016.

 

The EIA said gasoline stockpiles grew 1.1 million barrels, matching analysts’ expectations. Distillate stocks, which include heating oil and diesel, fell by 661,000 barrels, compared with analysts’ expectations for a 2.1-million-barrel increase.

 

Gasoline futures ended the session up 5.7% at $1.2414 a gallon, the largest gain in one session since Nov. 24. Diesel futures gained 2.9% to $1.1192 a gallon, their largest gain in one session since Dec. 3.

 

—Kevin Baxter, Ryan Dezember and Leslie Josephs contributed to this article. 

 

Corrections & Amplifications:  

Oil stockpiles had grown in 11 of the last 12 weeks. An earlier version of this article incorrectly stated that stockpiles had grown in 12 of the previous 13 weeks. (Dec. 23, 2015)