Oil prices rose 5 percent on Wednesday, their biggest advance in three weeks, after the US government reported a surprise draw in domestic crude stockpiles versus market expectations for a new record high. Minutes from the Federal Reserve's latest policy meeting indicating no rate hikes in April also weakened the US currency, making dollar-denominated oil more attractive to those holding the euro and other currencies.
After hitting one-month lows a day earlier, oil prices rallied by as much as $2 a barrel after the Energy Information Administration (EIA) said crude stockpiles dropped by 4.9 million barrels last week from lower imports and a continued ramp up in refinery runs. "These are constructive numbers and should keep the market from going lower in the near term," said Jeffrey Grossman, crude dealer with New York's BRG Brokerage.
Analysts polled by Reuters had expected inventories to hit record highs instead for an eighth straight week, building by 3.2 million barrels. US crude's front-month contract settled up $1.86 at $37.75 a barrel. It rallied to $37.90 earlier, after falling to $35.24 a day ago, its lowest since March 4. The 5.2 percent gain was the biggest in a day since March 16.
US crude futures also found additional support from TransCanada Corp's delayed restart of its 590,000 barrel per day Keystone pipeline that delivers crude to Cushing and Illinois. The discount in the front-month contract versus the second month was at its narrowest in three weeks following the outage. The front-month in Brent, the European benchmark, settled up $1.97 at $39.84 a barrel. Its session peak was $39.94. Brent prices were also underpinned by planned maintenance works at Norway's Ekofisk and Britain's Buzzard oil fields.
Wednesday's oil rally signalled a sentiment shift after last week's 7 percent drop in US futures and 4 percent in Brent amid worries the global glut in crude was growing again while producing countries' plans to freeze output was failing. The EIA report contained some bearish data, such as the first rise in gasoline stockpiles in six weeks and continued distillate builds. But traders chose to focus on the more bullish aspects, including the lower crude imports and higher refinery runs. "I think the market is more about the total change in (crude) inventories, rather than individual components," said Scott Shelton, energy broker with ICAP in Durham, North Carolina.