Oil Futures Spike on Equities Rebound

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange nearest to delivery and the Intercontinental Exchange Brent contract rallied Wednesday afternoon, with both benchmarks settling more than 4% higher. Easing geopolitical risk in Asia triggered a sharp rebound in global equities, while expectations of a bullish draw in U.S. crude and product inventories during the last week of August fueled additional buying interest.

Oil futures posted across-the-board gains on Wednesday after political developments in Hong Kong sparked a relief rally in Asian stock markets that spurred risk-on trading on Wall Street. The Dow Jones Industrial Average rose 237.45 points to 26,355.47 at the market close and the S&P 500 gained 1.1% to 2,937.78, while the Shanghai Composite Index was up 0.93% and Nikkei 225 ended the session up 0.12%. Equity markets across Europe also advanced. Investors around the world welcomed reports that Hong Kong's chief executive withdrew the extradition bill that fueled months-long demonstrations and hurt the region's economy.

Wednesday's higher session was aided by surprisingly bullish economic data from both the United States and China.

According to the Caixin purchasing managers index, China's service sector expanded in August at its fastest pace in three months amid gains in new orders and the biggest hiring increase this year. In the United States, the Commerce Department said Wednesday afternoon the overall U.S. trade deficit shrunk in July, while the bilateral gap in goods trade with key trading partners like China and European Union expanded further in August.

Despite mounting uncertainty around trade, the U.S. Federal Reserve referred to overall economic activity in the United States as "steady" with modest gains in the labor market and a mixed grade for consumer spending. In its monthly Beige Book, the Fed said manufacturing activity was slightly lower from a month prior amid an ongoing downturn in exports and global demand. Analysts believe Wednesday's sluggish report would support an argument for a rate cut at the coming Federal Open Market Committee's monetary policy meeting on Sept. 17 and 18.

The U.S. dollar weakened Wednesday afternoon, reversing down from Tuesday's more than two-year high at 99.330, sliding to a 98.340 low in afternoon index trading, easing some pressure off the oil complex.

Following two consecutive sessions of steep declines, NYMEX October West Texas Intermediate futures surged $2.32 to settle at $56.26 bbl, while the ICE November Brent contract advanced $2.44 to a $60.70 settlement. NYMEX October ULSD futures finished the session 7.69cts higher at $1.8802 gallon, with the October RBOB contract adding 6.24cts to $1.5329 gallon.

Wednesday's higher settlements also come ahead of the release of supply statistics for the last week of the peak driving season in the United States. Market participants overwhelmingly expect bullish draws to have occurred in both crude and products stocks during the week ended Aug. 30. Market expectations call for a 3 million barrel (bbl) drawdown from U.S. crude stockpiles, while gasoline stocks are seen to have declined 1.9 million bbl, with a modest draw of about 100,000 bbl eyed for distillate fuel.

The American Petroleum Institute will release its weekly report at 4:30 p.m. EDT, while official government figures from the U.S. Energy Information Administration will be published at 11 a.m. EDT Thursday.

Liubov Georges can be reached at liubov.georges@dtn.com

(BAS)