U.S. Oil Prices Rebound on Expectations of Strategic Reserve Replenishment

U.S. oil prices rebounded on Thursday, recovering from a three-day losing streak that saw prices drop over 3% following the Federal Reserve's decision to hold interest rates steady. Brent crude futures gained 0.7% to $84.02 per barrel, while U.S. West Texas Intermediate (WTI) crude climbed 0.7% to $79.53 per barrel.

The rebound was driven by speculation that if WTI falls below $79, the U.S. will move to build up its Strategic Petroleum Reserve (SPR). The U.S. has stated it plans to replenish the SPR after a historic sale from the emergency stockpile in 2022 and wants to buy back oil at $79 a barrel or less. Expectations of a potential ceasefire between Israel and Hamas also supported the market, though Israeli Prime Minister Netanyahu vowed to proceed with an attack on Gaza.

Why this matters: The U.S. government's plan to refill its strategic oil reserves at lower price levels could set a floor under oil prices and provide support to the market. Additionally, geopolitical tensions in the Middle East continue to impact global oil supply and demand dynamics.

However, oil prices had fallen sharply on Wednesday after the Fed kept interest rates steady, which may curtail economic growth and limit oil demand increases. The market was also pressured by an unexpected increase in U.S. crude inventories, with the Energy Information Administration reporting a 7.3 million-barrel rise in crude stocks, the highest level since June.

Despite the recent volatility, analysts expect OPEC to maintain output cuts through the second half of 2023, which will support prices. However, if prices move to a $90-$100 range, OPEC would likely ease cuts to provide a soft ceiling for oil. The continuing supply reductions by OPEC and its allies are expected to underpin oil prices going forward, even as the impact of the U.S. crude stock build and the Fed's rate decision is still being factored in.

Key Takeaways

• U.S. oil prices rebounded after 3-day losing streak post Fed rate decision.
• Expectations of U.S. SPR replenishment at $79/barrel or less supported prices.
• Geopolitical tensions in Middle East continue to impact global oil supply and demand.
• Unexpected rise in U.S. crude inventories and Fed rate decision may limit demand.
• OPEC expected to maintain output cuts, supporting prices, unless they reach $90-$100.