Oil prices rose sharply on Tuesday after the American Petroleum Institute (API) reported a surprise crash in U.S. crude inventories, signaling a tightening supply-demand balance in the world’s largest oil consumer.
API Data Shows Huge Draw In Crude Inventories
According to the API, U.S. crude oil inventories fell by 11.486 million barrels in the week ending August 25, 2023, compared with analysts’ expectations of a 2.9 million barrel draw. This was the largest weekly decline since January 2023, when crude stocks dropped by 12.8 million barrels.
The API data also showed that gasoline inventories rose by 2.4 million barrels, while distillate stocks increased by 1.8 million barrels. The official data from the U.S. Energy Information Administration (EIA) will be released on Wednesday.
The API report boosted oil prices, which were already supported by signs of strong demand recovery in China and the U.S., as well as supply disruptions in the Gulf of Mexico due to Hurricane Ida.
Oil Demand Recovery Outpaces Supply Growth
The unexpected drop in U.S. crude inventories reflects the robust oil demand recovery in the country, which has been boosted by the vaccination campaign and the reopening of the economy. According to the EIA, U.S. oil consumption averaged 20.6 million barrels per day (bpd) in July 2023, up from 18.8 million bpd in July 2022 and close to the pre-pandemic level of 21.1 million bpd in July 2019.
Meanwhile, U.S. oil production has been lagging behind demand, as shale producers have been cautious about increasing output amid uncertainty over the pandemic and environmental regulations. According to the EIA, U.S. crude output averaged 11.3 million bpd in July 2023, down from 11.5 million bpd in July 2022 and far below the record high of 12.9 million bpd in November 2019.
The supply-demand imbalance in the U.S. has been exacerbated by Hurricane Ida, which forced the shutdown of more than 90% of the Gulf of Mexico’s oil and gas production, as well as several refineries and pipelines along the Gulf Coast. According to the Bureau of Safety and Environmental Enforcement (BSEE), as of Tuesday, about 79% of the Gulf’s oil output and 77% of its gas output remained offline.
Global Oil Market Remains Tight Despite OPEC+ Output Hike
The tightness in the U.S. oil market is also reflected in the global oil market, which has been facing a supply deficit since May 2023, according to the International Energy Agency (IEA). The IEA estimates that global oil demand exceeded supply by 1.6 million bpd in July 2023 and by 1.4 million bpd in August 2023, despite the increase in output by the Organization of the Petroleum Exporting Countries and their allies (OPEC+).
OPEC+ agreed in July to raise its collective production by 400,000 bpd each month from August until December, aiming to restore its output to pre-pandemic levels by September 2022. However, some analysts doubt that OPEC+ will be able to meet its target, given the ongoing production problems in some members, such as Nigeria, Angola, Libya and Iran.
Moreover, some analysts expect that global oil demand will continue to grow faster than supply in the coming months, as vaccination rates improve and mobility restrictions ease in major oil-consuming regions, such as Europe and Asia. The IEA projects that global oil demand will rise by 5.3 million bpd in 2023, reaching an average of 99.4 million bpd, while global oil supply will increase by only 3.7 million bpd, reaching an average of 97.7 million bpd.
Oil Prices Reach Multi-Year Highs Amid Bullish Sentiment
The bullish outlook for oil demand and supply has pushed oil prices to multi-year highs in recent weeks. On Tuesday, Brent crude futures, the international benchmark for oil prices, rose by $1.15 or 1.36% to settle at $85.57 per barrel, while West Texas Intermediate (WTI) crude futures, the U.S. benchmark for oil prices, rose by $1.25 or 1.56% to settle at $81.35 per barrel.
Both benchmarks reached their highest levels since October 2018 on Tuesday and have gained more than 50% since the start of the year.
Some analysts believe that oil prices have more room to rise in the near term, as the market remains undersupplied and vulnerable to further supply shocks.
“The market is still very tight,” said Giovanni Staunovo, an analyst at UBS Group AG UBS
