Oil extends gains as QE remains intact, upbeat inventories data

Both WTI and Brent benchmarks extended yesterdays major advance as policy makers defied broad market expectations for Quantitative Easing tapering and left the monetary easing program intact. The oil market was also strongly supported by unexpectedly upbeat U.S. inventories data, which showed stockpiles fell to the lowest since March 2012. Gains however remained limited as Libya restored as much as 40% of its pre-civil war output.

On the New York Mercantile Exchange, WTI crude for delivery in November rose by 0.33% to $107.64 per barrel at 6:48 GMT. Prices held in range between days high and low of $107.98 and $107.24 a barrel respectively. Light, sweet crude rose by 2.7% on Wednesday, the biggest daily advance since August 27, and trimmed its weekly decline to little over 0.8% following Thursdays gains.

Meanwhile on the ICE, Brent oil for delivery in November traded at $110.86 per barrel at 6:49 GMT, up 0.26% on the day. Prices held in range between days high and low of $111.10 and $110.53 a barrel respectively. The European benchmark also surged 2.7% yesterday and reduced its weekly decline to little over 0.7%.

Dollar-denominated commodities received a strong boost yesterday after the U.S. dollar fell to a seven-month low as the Federal Reserve decided to keep its monetary easing program unchanged, confounding broad market expectations for a $10 billion reduction. According to a statement after the conclusion of FOMCs two-day meeting, policy makers “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” Chairman Ben Bernanke and his colleagues feared that the rising borrowing costs were showing signs of slowing the four-year expansion of the U.S. economy. Data showed on Tuesday that consumer inflation was struggling to pick up and remained well below Feds target at 2%. Bernanke once again said that there is “no fixed calendar schedule”.

The dollar index, which measures the greenbacks performance against six major trading partners, traded at 80.25 at 6:36 GMT, up 0.03% on the day. Prices held in range between days high and low of 80.33 and 80.17 respectively. The December contract plunged 1.3% on Wednesday and extended its weekly decline to over 1.7%. Dollar-priced commodities tend to trade inversely to the greenback. Weakening of the dollar makes raw materials priced in it cheaper for foreign currency holders and boosts the attractiveness of riskier assets.

Inventories data

The oil market also received a strong boost and Wednesday as the Energy Information Administration published an unexpectedly upbeat U.S. oil inventories data, which by large confounded analysts expectations. The government agency said that U.S. crude inventories dropped by 4.4 million barrels, or 1.2%, in the week ended September 13 to 355.6 million barrels. This was the lowest since March 2012 and neared the average range for this time of the year. Refineries utilization remained unchanged for a second week at 92.5%, rebutting analysts’ forecasts for a drop. Inventories at Cushing, Oklahoma, the biggest U.S. storage hub and delivery point for NYMEX-traded contracts, fell by 861 000 barrels to 33.3 million, the lowest in 19 months.

Both gasoline and distillate fuel production rose last week and averaged 9.3 million and 5.1 million barrels per day respectively. Motor gasoline supplies dropped by 1.6 million barrels, or 0.7%, but remained in the upper half of the average range for this time of the year. Meanwhile, distillate fuel inventories fell by 1.1 million barrels and remained near the lower limit of the average range. Total products supplied over the last four weeks averaged 19.1 million bpd, marking a 2.9% increase from the same period a year ago.

EIA’s upbeat data exceeded analysts’ projections. According to a Bloomberg News survey of analysts, the report was likely to show that U.S. crude oil inventories fell by 1.2 million barrels to 358 million, while both gasoline and distillate fuel supplies were projected to have increased by 500 000 barrels.

Michael McCarthy, a chief market strategist at CMC Markets in Sydney, said for Bloomberg: “That firm tone to oil markets is clearly coming from two sources. First of all, the fundamentals in the U.S. reflecting high demand, and secondly, the more rosy investment outlook for commodities after the Fed decision.”

Also supportive for the market, Iraqs oil exports remained curbed by maintenance works and a pipeline leak. Meanwhile, National Oil Corp. officials said on Wednesday that Libyas output has recovered to 40% of its 1.6 bpd pre-civil war level in 2011. However, Goldman Sachs analysts expect that the combined loss to supplies from Iraq and Libyas reduced output will total 100 million barrels by the end of September, keeping global markets tight.

Miswin Mahesh, an analyst at Barclays, said in a note: “News of the Fed refraining from tapering comes at the same time as relatively low spare capacity and relatively low crude and product stocks. These factors are expected to remain prevalent in the next year, reinforcing our price view of a $110 per barrel average for Brent in 2014.”