Oil Price Rebound Defies Significant Surge in Stockpiles, Focus Likely Shifting to Re-Fill For Depleted SPR

Oil prices have rebounded throughout the week, despite a significant build in commercial stockpiles. Part of that can likely be chalked up to developments in the monetary policy outlook at the Fed, but an even more significant factor is continually weak levels of supply on a relative basis.

New forecasts continue to indicate demand for oil will rise moderately in 2023, but supplies – particularly those within the US’s strategic petroleum reserve (SPR) – will likely remain thin due to suppressed domestic production and outright cuts in the international market by OPEC+. The Biden administration has expressed a desire to re-fill the depleted SPR once oil futures are around $70.00 per barrel, which would effectively turn the White House from a seller to a buyer, and potentially put a floor under spot prices in the near term.

Related ETFs: SPDR S&P Oil & Gas Exploration & Production ETF (XOP), Energy Select Sector SPDR Fund (XLE), Invesco DB Oil Fund (DBO)

After falling toward a 2022 trough late last week, WTI benchmark crude oil futures have staged a strong comeback in recent days, rebounding roughly 10.0% to more than $77.00 per barrel on Thursday morning, up from lows near $70.00 last Friday. Part of that outlook can be chalked up to gradually weakening inflation figures and, therefore, a reflexive softening of the Federal Reserve’s hawkishness on monetary policy. Though the central bank remains very committed to further rate hikes, projecting a median policy rate of 5.1% in 2023 versus the current upper limit of 4.5% on the Fed Funds rate, the size of their latest hike was just 50bps, as opposed to the 75bps the market had become accustomed to throughout prior four meetings. As MRP noted back in August, the Fed had already reached a level of “peak hawkishness” some time ago, wherein the pace and size of rate hikes reached maximum velocity and would only slow from there.

That peak was officially passed yesterday, which was likely one of the key factors that helped boost oil prices in the face of a 10.2 million barrel build in US crude inventories through the week to December 9 – the largest in 21 months. Typically, an unexpectedly large surge in stockpiles would crush oil prices. But, in addition to the first hint of dovish news out of the Federal Reserve in months, a closer look at current oil supplies show a relatively bullish mix may be bubbling below the surface.

First and foremost, the large weekly increase in crude oil stockpiles followed a 4-week skid that saw more than 26.8 million barrels exit crude inventories. Even with the large rise in crude inventories, days of supply in stock climbed to just 25.8, only slightly higher than a 33-month low of 25.2 reached in the week prior. Additionally, more than 4.7 million barrels of oil were released from the US’s strategic petroleum reserve (SPR) throughout the week (the largest release since October), likely…