Oil Up After Supply Dip, But Backs Off $50

May 25, 2016

New York (Reuters) – Oil prices rose as much as 1% on Wednesday after the U.S. government reported a larger-than-expected drop in crude stocks for last week, but profit-taking after the data kept prices below the $50/barrel level that oil bulls had been hoping for.

The U.S. Energy Information Administration said crude inventories fell 4.2 million barrels in the week ending May 20. While the decline was steeper than the 2.5 million barrels forecast by analysts in a Reuters poll, it was not as much as the 5.1 million expected by the trade group American Petroleum Institute.

Futures of Brent and U.S. crude's West Texas Intermediate, WTI (related ETF: United States Oil Fund LP (USO | B-100)) fell briefly after the EIA data, then consolidated and traded at the lower end of the day's gains.

Brent (related ETF: United States Brent Oil Fund LP (BNO)), was up 60 cents, or 1.3%, at $49.21 a barrel by midmorning trading after a session high at $49.69.

WTI rose 40 cents, or 0.9%, to $49.02, after peaking at $49.62.

Hitting A Wall At $50/Barrel

Oil bulls have been hoping in recent weeks that crude would rise to $50/barrel or more, after global crude flows declined nearly 4 million barrels per day due to wildfires in Canada's oil sands region, a near economic meltdown in OPEC member Venezuela, and a spate of violent attacks against the Libyan and Nigerian energy industries.

"While we do feel the rally could go slightly further and test the psychological $50 level, we also think the rally has been priced in, especially with the impact expected from Canadian wildfires," said Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors in New York.

"So, we wouldn't be surprised to see more profit-taking from the longs, especially since there was no immediate follow-through in buying after the data," he added.

Gasoline futures (related ETF: United States Gasoline Fund LP (UGA)), fell nearly 1.5% to around $1.63 a barrel after the EIA reported that gasoline stockpiles rose by 2 million barrels last week, confounding analysts' expectations in a Reuters poll for a 1.1 million barrels drop.

"Gasoline looks to be the weakest horse right now, and the momentum of the recent rally that started on May 10 now looks to be breaking down," said David Thompson, executive vice president at commodities broker Powerhouse in Washington.

He said the picture could worsen for gasoline if futures for the motor fuel break below the $1.60 support. "The bears will be encouraged to increase their selling pressure."

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