Oil prices edged higher on Wednesday as a drop in US crude and gasoline inventories exceeded expectations alleviating concerns over a supply glut.
Crude oil inventories in the United States fell by 1.7 million barrels in the week ending June 25 according to the American Petroleum Institute (API). This exceeded analysts' expectations of a 4.4 million barrel decline. Additionally gasoline inventories decreased by 6.1 million barrels compared to the forecasted 1.6 million barrel drop.
The unexpected decline in both crude oil and gasoline stocks buoyed market sentiment and lifted oil prices. Brent crude futures rose 0.5% to $75.56 per barrel while US West Texas Intermediate (WTI) crude futures climbed 0.7% to $74.56 per barrel.
The drop in US inventories comes as demand for oil continues to recover amid a rebound in economic activity worldwide. As countries ease COVID-19 restrictions and increase travel the demand for fuel has been steadily rising. This has led to a gradual drawdown of crude oil inventories supporting prices.
Furthermore the decision by the Organization of the Petroleum Exporting Countries and its allies collectively known as OPEC+ to gradually increase production has also provided support to oil prices. OPEC+ agreed to raise production by 400000 barrels per day each month starting in August in an effort to meet growing demand.
However the market remains cautious due to concerns over the spread of the Delta variant of COVID-19 and its potential impact on global economic growth. The highly transmissible variant has led to renewed lockdown measures in some countries raising fears of reduced oil consumption.
In addition negotiations between Iran and world powers to revive the nuclear deal continue to cloud the market outlook. A potential return of Iranian oil to the market could add to supply and put downward pressure on prices.
Despite these uncertainties oil prices have been supported by the overall positive sentiment in the market. The International Monetary Fund (IMF) recently upgraded its global economic growth forecast for 2021 to 6% reflecting a stronger-than-expected recovery. This indicates a favorable outlook for oil demand in the coming months.
In conclusion oil prices ticked up on the back of a larger-than-expected drop in US crude and gasoline inventories. The decline in stocks along with the gradual increase in production by OPEC+ has boosted market confidence and supported oil prices. However concerns over the spread of the Delta variant and the ongoing Iran nuclear deal negotiations continue to weigh on the market. The positive global economic outlook and increasing oil demand provide a favorable backdrop for oil prices in the near term.
