Oil Extends Rally as Focus Shifts From OPEC+ Cut to Inventories

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(Bloomberg) — Oil rose as signs of a further drawdown in US inventories helped prices to extend a rally driven by an unexpected OPEC+ supply cut.

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West Texas Intermediate rose toward $81 a barrel after closing at the highest level in almost 10 weeks. The industry-funded American Petroleum Institute reported nationwide crude stockpiles fell 4.3 million barrels, including a drop at the key storage hub in Cushing, Oklahoma, according to people familiar with the data. The breakdown also pointed to lower gasoline and distillate holdings.

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Crude rallied by almost 7% in the first two days of the week after the Organization of Petroleum Exporting Countries and its allies including Russia blindsided the market with a surprise supply cut. The cartel’s move, which was aimed at investors betting against gains, reinvigorated the debate among leading banks about whether crude can rally back to $100 a barrel.

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Oil has also risen by more than a quarter since its lows in March, when a banking crisis harmed appetite for risk assets including oil. Before the lift from the OPEC+ cut, the upswing was underpinned by expectations for a rebound in Chinese demand after Covid Zero was abandoned. In addition, a weaker dollar has helped to boost the allure of commodities priced in the US currency.

Crude’s gain came despite US data on Tuesday that pointed to a slowdown in the labor market, with the figures adding to speculation that the Federal Reserve may pause its run of rate hikes as inflation cools.

“It looks like oil has noted, but is not daunted by, the ramifications of a weaker jobs market,” said Vishnu Varathan, the Asia head of economics and strategy at Mizuho Bank Ltd. “First-order inflation risks are overblown.”

Key market metrics pointed to expectations for a tighter market. Brent’s December-December spread — the difference between the contract for the final month of this year and in 2024 — widened to $5.72 a barrel. That’s up from about $3 a barrel a week ago.

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