Oil prices surged to their highest levels in six months on Wednesday as the Fed left interest rates unchanged. WTI jumped by 2.8 percent to $45.29 per barrel and Brent climbed by 3.17 percent to $47.19 per barrel.
Those are the highest prices so far in 2016 and the oil markets continue to bet on rising momentum for crude. The Federal Reserve added strength to oil when it announced its decision to leave interest rates unchanged, a move that caused the dollar to weaken and oil prices to rise. The Fed also softened its language regarding its concerns over the health of the global economy, which signals a bit of confidence that demand could pick up pace.
The EIA also revealed on Wednesday that U.S. oil production continues to fall. Weekly output fell by another 20,000 barrels per day to 8.938 million barrels per day. U.S. production is down almost 800,000 barrels per day from the April 2015 peak.
But there are still some warning signs for crude oil. While industry data pointed to a decline in crude oil inventories, the EIA disappointed oil traders when it reported an uptick in storage levels. The U.S. set another all-time record, with storage rising by 2 million barrels last week to 540 million barrels.
Also, the durability of the sharp rise in oil prices over the past two months – both WTI and Brent are up about 70 percent since February – could be tested if speculators decide to lock in profits and sell off their long bets. Additionally, if U.S. shale drillers decide to send rigs back into the oil patch, some drilled but uncompleted shale wells could begin to come online, adding new supply to the already flush market. Oil bulls are hoping the worst is over, but they are not out of the woods yet.
By Charles Kennedy of Oilprice.com