WTI surges to two-month highs in mid-$82.00s as dollar dives post-CPI, US oil inventories post eighth successive draw

• WTI has surged into the mid-$82.00s and is trading at more than two-month highs as the dollar falls post-CPI.
• Oil prices saw a positive reaction to the latest weekly US EIA inventory report which showed an eighth successive draw.

Oil prices hit more than two-month highs on Wednesday, buoyed as the US dollar weakened in wake of a broadly in line with expectations US inflation report. Front-month WTI futures recently hit the $82.50 mark, their highest level since 10 November and well above their levels prior to the initial news of the Omicron Covid-19 variant (in the $78.00 area). WTI has bounced more than $4.50 since its earlier weekly lows under $78.00 a rally of roughly 6.0%, with prices up a further $1.20 or 1.5% on Wednesday as the dollar crumbles. Oil bulls will now surely be eyeing a test of 2021 highs in the $85.00s area.

Despite showing inflationary pressures hitting their highest in the US since 1982 with the headline Consumer Price Index up 7.0% YoY in December, traders have taken the data, which was broadly in line with expectations, as a green light to take profit on dollar long positions. The DXY now trades down nearly 0.5% on the day having cratered from above 95.50 towards the 95.00 level. A weaker dollar makes USD-denominated crude oil cheaper for purchase by international buyers, hence boosting its demand.

The weakening of the US dollar has been one of the primary drivers of higher oil prices this week, with the DXY now down more than a percent from earlier weekly highs, though crude oil-specific factors are also being cited. Market participants remain bullish on the demand outlook for 2022 with the economic impact of Omicron seen as likely to be short-lived, which spurred the US EIA to upgrade its oil demand outlook for the year. The agency said on Tuesday that it now sees US demand rising 840K barrels per day (BDP) in 2022 versus its forecast last month of demand rising 700K.

Meanwhile, OPEC+ output remains a supportive theme, with smaller producers (Libya and Nigeria) still struggling to keep up with recent output quota increases and talks between Western powers and Iran on a return to the JCPOA not making any progress. That suggests no return of large amounts of Iranian crude oil exports to global markets anytime soon. Some a fretting about the risks to demand in China/Asia as China maintains its zero Covid-19 stance even in the face of the much more transmissible Omicron variant, but lockdowns there, for now, remain localised.

Finally, WTI saw a modest boost from the recently released weekly US EIA crude oil inventory report. The report showed a draw in crude oil stocks of roughly 4.5M barrels, much larger than the expected 1.9M barrels, despite Tuesday’s private inventory report pointing to a smaller than expected draw of roughly 1M barrels. However, Distillate stocks rose by roughly 2.5M barrels, more than the 1.75M barrels expected, and gasoline stocks saw a massive near 8M barrel rise, well above expectations for a 2.4M build. Nonetheless, the bullish headline number stole the focus, with headline crude oil stocks having now drawn for eight successive weeks.