WTI crude oil drops 3% despite the largest ever drop in US weekly inventories📉
Although the crude oil inventory reading today indicated the largest ever drop in stocks, Brent and WTI contracts are extending the downward trend. Risk aversion and cash inflows into the US dollar are putting pressure on commodities. At the same time, the almost complete lack of reaction to the 'historic' oil market data reading may suggest that demand will return once market sentiment stabilises somewhat.
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The reading is generally negative for risk assets, as it may suggest a pro-inflationary rally in oil prices. In terms of CPI inflation, lower y/y fuel prices have added enormously to the global 'disinflationary trend'.
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Against the backdrop of a still strong US economy and a strong labour market, higher fuel prices may prompt the Fed to tighten its rate hike cycle. This, in turn, could herald downward pressure on Wall Street, which has recently euphorically embraced lower-than-forecast US CPI and PCE data
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Interestingly, however, the news comes as no surprise, as private data compiled by the API already pointed to a record decline in crude inventories yesterday. During the Asian session, crude quotations gained, nevertheless this movement was completely negated against a gaining US dollar.
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At the same time, the massive fall in stocks does not determine further demand for oil. This, against the backdrop of China's weakness and the uncertain impact of rate hikes by major central banks, can still be perceived by investors as uncertain. However, there is no doubt that today's reading could upset the supply and demand balance. It also highlights the risk of an unfinished battle against inflation. If oil were to remain at higher levels for an extended period of time - the Fed would probably be inclined to maintain a restrictive stance for a correspondingly longer period.
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The weekly reading of the change in US crude oil inventories shows the biggest drop in the history of DOE data. Source: Bloomberg Finance L.P.
WTI crude oil stocks are currently losing close to 3%. Source: xStation 5
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