Oil Price Surges 2% On US Crude Drawdown, Weaker USD

Crude oil prices hit two-month highs on Wednesday on the back of tight supply as crude inventories in the United States fell to their lowest since 2018, and as the US dollar weakened and concerns eased about the Omicron coronavirus variant.

US crude inventories retreated by 4.6 million barrels last week to 413.3 million barrels, their lowest since October 2018 according to the Energy Information Administration. Forecasts refer to in a 1.9 million-barrel drop.

The crude draw was bigger than expected despite a material drop in refining activity. Brent crude futures settled up 95 cents, or 1.1%, at $84.67 a barrel. US West Texas Intermediate crude futures were up $1.42, or 1.8%, at $82.64.

The falling dollar was the main driver of higher oil prices, overtaking even the EIA draw. The weaker US dollar makes dollar-denominated oil contracts cheaper for holders of other currencies.

The Dollar Index (DXY) fell to a fresh low against a basket of currencies after data showed US consumer prices rose solidly in December. The Brent contract was backward, with front-month delivery around $4.41 more expensive than delivery in six months, indicating tight near-term supply.

OPEC+ producers, the Organization of the Petroleum Exporting Countries and its allies are still holding back more than 3 million barrels per day (bpd) in output while Iranian exports are pinned back by US sanctions.
Though OPEC+ is raising output targets each month, technical difficulties have prevented several countries from hitting their quotas.
US Federal Reserve Chairman Jerome Powell said the US economy should weather the current COVID-19 surge with only “short-lived” impact and is ready for the start of tighter monetary policy. read more

US crude inventories have dropped for seven consecutive weeks, and overall inventories have been tightening across the globe as major producers struggle to increase supply even as demand rises despite rising cases of Omicron.

With OPEC+ being able to raise production clearly limited, no reason can be seen why Brent crude cannot move towards $100 in Q1, if not sooner.