U.S. oil prices rise as traders expect slow Gulf output recovery to hit U.S. supplies in coming weeks

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U.S. oil futures headed higher on Thursday as traders bet that a slow recovery in Gulf of Mexico energy output following Hurricane Ida will lead to big U.S. supply declines in coming weeks, as the most recent data reveal a drop of more than 7 million barrels in gasoline inventories.

Prices shook off earlier losses from reports that China plans to release crude oil from its national reserve, in a move to ease commodity inflation.

There’s a chance that the announcement by China was “backward looking” — meaning that the secretive nation may have already released oil from its petroleum reserve — so there may not be any “new” oil on the market, said Phil Flynn, senior market analyst at The Price Futures Group.

Production issues in the Gulf of Mexico are still significant, and the market has already seen a much bigger-than-expected drawdown in gasoline supplies so “that’s going to keep the market supported,” he told MarketWatch.

West Texas Intermediate crude for October delivery CL00, -0.36% CLV21, -0.36% rose 12 cents, or 0.2%, to $69.42 a barrel on the New York Mercantile Exchange. November Brent crude BRN00, -0.43% BRNX21, -0.43%, the global benchmark, was down 2 cents, or 0.03%, at $72.58 a barrel on ICE Futures Europe.

China plans to auction off oil from its reserve in phases, Reuters reported, citing a statement from China’s National Food and Strategic Reserves administration, which didn’t specify the amount of crude it would put up for sale.

“This is the first officially announced release from the strategic petroleum reserve in China ever,” said Flynn. “China has been building a reserve for many years, but it is clear that they are very concerned about tight supplies and rising prices and inflation.”

“China using the strategic petroleum reserve to try to manipulate prices may work in the short run,” he said, suggesting the announcement might actually be a “confirmation” of oil that was previously released. It may also “not work in the long run [as] trying to cool off oil demand by artificially lowering prices at a time when demand is growing is only going to encourage more demand — hence tighter supplies and in the long run, higher prices.”

Meanwhile, there appears to be no end to the reports of supply outages, said Carsten Fritsch, analyst at Commerzbank, in a note.

The U.S. Bureau of Safety and Environmental Enforcement late Wednesday estimated around 77% of oil and natural-gas production in the Gulf of Mexico remains shut in. Hurricane Ida, a deadly and powerful storm, made landfall on the Louisiana Gulf Coast on Aug. 29, also forcing the closure of refineries, several of which have reopened.

The Gulf closures equate to a daily production loss of 1.4 million barrels, Fritsch said, noting that it is “still taking production considerably longer to normalize again after Hurricane Ida than it did after Hurricane Katrina 16 years ago, when 40% of production had already been restored by this time.”

Meanwhile, production from the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, raised their collective crude production by 50,000 barrels a day in August, according to an S&P Global Platts survey released Thursday.

The small increase came despite the group deciding early this month to continue boosting output by 400,000 barrels a day in a bid to eventually erase the production curbs put in place last year as the pandemic hurt demand for oil.

On Thursday, the Energy Information Administration reported on Thursday that U.S. crude inventories fell by 1.5 million barrels for the week ended Sept. 3.

That was a “modest draw” in a week where the data have been “massively mottled by Hurricane Ida,” said Matt Smith, lead oil analyst, Americas, at Kpler.

The decline came in well below the average decrease of 7.4 million barrels expected by analysts polled by S&P Global Platts forecast. The American Petroleum Institute on Wednesday reported a 2.9 million-barrel decrease. Weekly supply data were released a day later than usual due to Monday’s Labor Day holiday.

The EIA also reported weekly inventory declines of 7.2 million barrels for gasoline and 3.1 million barrels for distillates. The S&P Global Platts survey had forecast supply decreases of 2.4 million barrels for gasoline and 2 million barrels for distillates.

Crude stocks at the Cushing, Okla., storage hub edged up by 1.9 million barrels for the week, the EIA reported.

On Nymex Thursday, October gasoline RBV21, -0.29% fell 0.2% to $2.13 a gallon and October heating oil HOV21, -0.32% lost 0.3% to $2.13 a gallon.

Natural-gas futures edged higher after rallying by 7.6% on Wednesday, buoyed by tight U.S. supplies and a slow recovery in Gulf production.

In Thursday dealings ahead of the EIA’s weekly update on supplies of U.S. natural gas, the October futures contract NGV21, +1.71% traded at $4.948 per million British thermal units, up 0.5%.

The EIA on Thursday reported that domestic supplies of natural gas edged up by 52 billion cubic feet for the week ended Sept. 3.

That was more than the average increase of 33 billion cubic feet forecast by analysts polled by S&P Global Platts, though below the five-year average build of 65 billion cubic feet.