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Oil Jumps 4.5% on Huge US Draw, Rate-Cut Hopes, Gulf Storm Worries

By Barani Krishnan

Investing.com - The EIA has delivered – beyond expectations.

The question is will demand worries return after this?

Both New York-traded West Texas Intermediate crude and U.K. Brent oil rallied more nearly 4.5% on Wednesday after the U.S. Energy Information Administration announced a crude drawdown for last week that was about three times above market expectations. The EIA’s latest report made up almost perfectly for the previous week when it cited a crude draw three times below forecasts.

Adding to Wednesday’s market fervor was news of major producers beginning evacuation and production shut-downs in the Gulf of Mexico on the prospects of a tropical disturbance turning into a storm later on Wednesday or Thursday. The Gulf of Mexico is home to 17% of U.S. crude oil output which stands at around 12 million barrels per day.

Also supporting the market was Federal Reserve Chairman Jay Powell’s assurances to Congress that the Fed will “act as appropriate” to sustain the current economic expansion – a remark seen as signaling a rate cut in July.

WTI crude settled up $2.60, or 4.5%, at $60.43 per barrel. It hit a seven-week high of $60.53 earlier.

Brent, the benchmark for oil outside of the U.S., finished the session up $2.85, or 4.4%, at $67.01. It rose to a six-week peak of $67.12 earlier.

WTI is up about 33% this year, with Brent up 24.6%. The American Automobile Association's Daily Fuel Gauge Report showed the national average price of gasoline at $2.75, up slightly from Tuesday and 21.4% on the year.

The EIA said in its regular weekly report that crude oil inventories decreased by 9.5 million barrels in the week to July 5, versus forecasts for a draw of 3.08 million barrels. In the previous week, it reported a crude stockpile decline of of 1.09 million barrels against expectations for a drop of more than 3 million.

The latest EIA report also showed that gasoline inventories decreased by 1.5 million barrels, compared with expectations for a draw of 1.30 million barrels. Distillate stockpiles rose by 3.7 million barrels, compared to forecasts for a gain of 0.74 million.

While the numbers – and corresponding market action – were a pleasantly bullish surprise for the longs, some cited the possibility of unknowns in supply-demand – such as China and the trade war – rearing their head again to offset some of the positive impact from the latest EIA report.

“$60 is definitely a resistance on crude and several bullish factors are being seen that could have an impact to break through those levels,” said Tariq Zahir, founder of the oil-focused Tyche Capital Advisors fund in New York.

“The markets may see a risk on or risk off attitude which we feel could directly impact the price and movement on the energy sector.”

Ongoing trade tensions between the U.S. and China have raised fears about weaker demand, and investors have been on the lookout for signs that rapidly increasing U.S. production is being consumed.

The EIA report showed that U.S. output once again ticked up to 12.3 million barrels per day, near record highs.

Energy stocks mostly moved higher on the report. Chevron (DE:CVX) and Exxon Mobil (NYSE:XOM) were up roughly 1%.

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