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Futures Movers: Oil ends sharply higher, bouncing back as fall in China COVID cases drive demand hopes

An earlier version listed an incorrect figure for March annual inflation. The article has been corrected.

Oil finished with strong gains on Wednesday, reversing a prior-session selloff after signs of easing COVID cases in global growth engine China. A price inflation update for April also came in hotter than expected.

Price action
  • West Texas Intermediate crude for June delivery  CL00, +5.84% CLM22, +5.84% CL.1, +5.84% rose $5.95, or 6%, to settle at $105.71 a barrel on the New York Mercantile Exchange, after closing below $100 a barrel on Tuesday.
  • July Brent crude BRN00, -0.11% BRNN22, -0.11%,  the global benchmark, rose $5.05, or 4.9%, to finish at $107.51 a barrel on ICE Futures Europe.
  • June natural gas NGM22, +3.45%  rose 3.5% to close at $7.64 per million British thermal units.
  • June gasoline  RBM22, +3.89% jumped 4.1% to end at $3.6855a gallon, while June heating oil  HOM22, +0.51% rose 0.5% to $3.9512 a gallon.
Market drivers

China’s daily COVID case count on Monday fell to its lowest since mid-March, news reports said. Restrictions on movement in China via a “Zero COVID” policy has fueled concerns over a growth slowdown in the world’s biggest importer of crude. That’s as supply worries are a constant backdrop for the commodity.

Morgan Stanley analysts forecast Brent oil will reach $130 a barrel by the end of 2022, with U.S. oil hitting $120, noting that fundamentals for the commodity remain strong.

Oil remained higher after the April consumer price index showed a slowing in inflation to an 8.3% pace from a four-decade high of 8.5% in March, though the reading exceeded forecasts for 8.1% and was seen ensuring the Federal Reserve will continue to move aggressively to raise interest rates and otherwise tighten monetary policy.

See: What’s next for markets after inflation data fails to deliver ‘watershed moment’

“Crude prices are bouncing back higher in what has otherwise been a bearish week for the oil market. Since the start of the week, [nearby] WTI has moved from just over $110/bbl (barrel), to briefly sub-$100/bbl,” said Robbie Schneider, manager of global research and analytics at Schneider Electric, in a note.

“As has frequently been the case in recent weeks though, buying interest moved in as soon as [nearby WTI] traded near $100, flipping the trend higher for now,” he said.

Oil maintained gains after the Energy Information Administration said U.S. crude inventories jumped by 8.5 million barrels last week. Analysts surveyed by S&P Global Commodity Insights had, on average, forecast a fall of 1.8 million barrels.

Gasoline inventories dropped 3.6 million barrels versus a forecast for a 1.9 million barrel drop, while distillate stocks were down 900,000 barrels, compared with expectations for a 1.6 million barrel drop. The American Petroleum Institute late Tuesday reported crude inventories rose 1.62 million barrels last week, according to a source, while gasoline stocks were seen up 820,000 barrels and distillate supplies up 660,000 barrels.

The jump in crude inventories was driven by the release of crude from the Strategic Petroleum Reserve into commercial stocks, said Matt Smith, lead oil analyst for the Americas at Kpler.

“Last week’s 7-million-barrel SPR release is the key driver behind the big build — but such large transfers are something the market is going to have to get used to,” Smith said. “Crude exports also dipped last week, aiding the big build — although both rising refinery runs and a minor drop in imports tried to keep the increase in check, but to no avail.”

Meanwhile, the decline in gasoline and distillate stocks helped offset the “outlandish” crude inventories rise, he said, but noted that implied demand for both slipped from the previous week.

Meanwhile, some analysts said the cutoff of a gas pipe in Ukraine for Russian supply that flows to European households was of concern and potentially boosting the overall backdrop for energy prices.

Ukraine’s pipeline operator, though said it would use another hub, not affecting flow, though Russia’s state-owned oil group Gazprom said gas supplies were down 25% from the day prior that it sends through Ukraine, according to a report by the Associated Press. The two countries have been at war since an invasion by Russia in late February.

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