Oil prices suffer biggest one-day drop in over a month despite historic fall in crude inventories

By William Watts

U.S. oil stocks down 17 million barrels last week: EIA

A historic drop in U.S. crude inventories wasn't enough to lift oil futures Wednesday, with the U.S. and global benchmarks suffering their biggest one-day declines in more than a month.

Price action

Market drivers

The Energy Information Administration on Wednesday morning reported that U.S. crude inventories dropped by more than 17 million barrels in the week ended July 28. Gasoline inventories, however, rose by nearly 1.5 million barrels, while distillate stocks fell by 800,000 barrels.

Analysts surveyed by S&P Global Commodity Insights, on average, had forecast the EIA to show crude inventories fell 3.7 million barrels last week. Gasoline stocks were expected to show a drop of 1 million barrels, with distillate inventories down 400,000 barrels.

"Oil prices are falling as the macro backdrop is killing sentiment," said Edward Moya, senior analyst for the Americas at Oanda.

A downgrade of the U.S. credit rating to AA+ from AAA by Fitch Ratings was seen as a negative for overall market sentiment. Treasury yields were on the rise as the Treasury Department detailed plans to increase supply. Rising debt yields lifted the greenback, with the ICE U.S. Dollar Index DXY up 0.3%.

See: Fitch cuts U.S. credit rating: Here's what you need to know

"Also weighing on oil is a strong dollar that won't be going away anytime soon as Treasury yields surge given the increased total of debt sales that will be coming from the Treasury," Moya told MarketWatch.

It was the combination of robust crude exports and strong refinery runs that yielded the largest draw to weekly U.S. crude inventories on record, said Matt Smith, lead oil analyst for the Americas at Kpler.

"This is very much a timing issue: peak summer refining activity has coincided with very strong end-of-month exports, and draws of such magnitude should not be expected going forward," he said.

The American Petroleum Institute, an industry trade group, late Tuesday reported a 15 million barrel drop in U.S. crude inventories last week, according to a source citing the data, while gasoline stocks fell 1.7 million barrels and distillates were down 512,000 barrels.

The API report had signaled a large crude draw, with set up "a case of buying the rumor and selling the fact for WTI," which headed lower after running into technical resistance, Smith said.

Meanwhile, a Bloomberg survey released Tuesday showed output by the Organization of the Petroleum Exporting Countries, or OPEC, dropped by 900,000 barrels a day in July, the lowest since 2020. Saudi Arabia led the decline with a drop of 810,000 barrels a day, bringing production to 9.15 million barrels a day.

Saudi Arabia previously announced it would extend its production cut of 1 million barrels a day through August. Many analysts said they expect it to announce later this week that the cut will continue through September.

-William Watts

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08-02-23 1521ET

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