WTI extends recovery above $85.00 as EIA oil inventories drop by 1.725M barrels

• Oil prices have recovered sharply amid a drop in oil inventories and in anticipation of sanctions on Russia.
• Investors have shrugged off headlines of an additional oil supply of 15 million barrels from the US SPR.
• The black gold may face headwinds from unchanged PBOC policy and upbeat yields.

West Texas Intermediate (WTI), futures on NYMEX, have soared as a drawdown in crude oil stockpiles, reported by the Energy Information Administration (EIA) on Wednesday, returned optimism. The oil prices have extended their gains above the critical resistance of $85.00 to near $85.57 in the early European session.

On Wednesday, the EIA reported a drop in oil inventories by 1.725M barrels vs. expectations of an increment of 1.38M and the prior release of 9.88M. A surprise decline in oil stockpiles has infused optimism in the black gold, defended the pessimism from the oil release announcement by US President Joe Biden. US Biden announced a release of 15 million barrels from the Strategic Petroleum Reserve (SPR) to balance out the demand-supply mechanism.

Optimism in oil prices is also backed by anticipation of further sanctions on the oil supply from Russia, which may cripple the global oil supply.

On a broader note, headwinds for oil prices are far from over. An unchanged monetary policy by the People’s Bank of China (PBOC) may bring pessimism to black gold. Despite the economic turmoil due to the continuation of the zero-Covid-19 policy and vulnerable real estate demand, PBOC kept its Prime Lending Rates (PLR) unchanged. An absence of further monetary policy may impact the sentiment of the market participants.

Meanwhile, the US dollar index (DXY) has dropped sharply and has printed an intraday low of 112.77 as the risk aversion theme has faded. S&P500 futures have recovered their entire overnight losses amid a rebound in the risk-on market mood. Returns on 10-year US Treasuries are still solid.