Oil Soars 3% as Market Shorts Try to Avoid Being “Naked” Before Weekend 

By Barani Krishnan

Investing.com -- Bottom-fishing and market shorts not wanting to be “naked” before the weekend sent crude prices soaring on Friday, extending the recovery in oil which hit seven-month lows earlier this week on an array of demand issues.

In a relative calm to the perfect storm that hit oil bulls between Tuesday and Wednesday, U.S. crude settled well above $85 per barrel while U.K. Brent oil stayed over $90. 

The about 3% gain came amid a CNN report from late Thursday that the Biden administration might stop dumping barrels from the U.S. Strategic Petroleum Reserve, or SPR, on the market after October, in a bid to keep down energy prices that have fed runaway inflation.

Aiding oil's recovery was the dollar's retreat from its biggest rally in two decades. The Dollar Index, which pits itself against six major currencies led by the euro, slid for a third day in a row, reaching a low of 108.35 from Wednesday’s 20-year high of 110.79. The greenback slid even as Federal Reserve officials pushed on Friday for another outsized rate hike to keep inflation down, when the central bank meets on Sept. 21.

Those long oil also leveraged on old but positive news from earlier in the week that Russian President Vladimir Putin might shut down all energy exports from his country should there be more clampdowns by the West on the selling price of Russian oil and gas.

“Putin’s threat to cut off all energy supplies is a growing risk as Ukraine recaptures territory,” said Ed Moya, analyst at online trading platform OANDA. 

“The risk of some supply disruptions over the next few months remains elevated and that should help oil prices stay above the $90 a barrel level,” Moya said, referring to Brent.

John Kilduff, partner at New York energy hedge fund Again Capital, concurred. “Yeah, it’s mostly bottom-fishing on recycled news that’s helping the market extend its recovery today, including the on-off plan to release more SPR barrels after October.”

“The point is no short really wants to go naked into the weekend, especially considering how volatile things can get as a new week begins.” 

U.S. Energy Secretary Jennifer Granholm told Reuters in an interview on Thursday that the administration might consider extending SPR drawdowns beyond October. Bloomberg cited several administration officials, speaking anonymously, as backing the plan. 

But a CNN report later on Thursday quoted White House sources as saying the administration was not considering tapping emergency oil releases after October. While that CNN report was also linked to anonymous sources, it was lapped up more readily by oil bulls wanting to put a firm floor to the market after an 8% plunge between the close of Monday and Wednesday.

The Biden administration has been drawing down the SPR since November last year. But outflows from the reserve really accelerated in May when the administration embarked on a battle to bring down the spiraling pump price of gasoline that had bumped U.S. inflation to 40-year highs. The president committed to draw down 180 million barrels from the reserve over a six month period — or roughly one million barrels per day — between May and October. 

At latest count, the SPR had released a total of 173.8 million barrels since March, a figure that includes volumes associated with an earlier round of tenders, Bloomberg reported on Thursday. 

The SPR stockpile itself was at 442.5 million barrels last week — its lowest since November 1984. 

Gasoline reached a record high of $5.01 a gallon on the average at U.S. pumps in mid-June before tumbling steadily on the back of the SPR releases. By Friday, it averaged at under $3.75 per gallon, according to the American Automobile Association. Some analysts say the price could be below $3 by October.

The New York-traded West Texas Intermediate, which serves as the U.S. crude benchmark, settled up $3.35, or 3.9%, at $86.79. For the week, it was off by just 8 cents or less than 0.1%. Prior to the rebound, WTI hit a seven-month low of $81.20 this week, pulverized by new COVID-19 lockdowns in top oil importer China.

Brent, the London-traded global benchmark for oil, settled up $3.69, or 4.1%, at $92.84 per barrel. For the week, it was off by 18 cents or 0.2%. Prior to the rebound, Brent hit a seven-month low of $87.25 this week.

WTI’s technical charts indicated more support forthcoming for the U.S. crude benchmark.

“Going into the week ahead, the oversold daily and weekly stochastics might provide WTI more mileage to reach $91 and even extend to $97,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. “But should there be fresh capitulation under $85 next week, then the trap door’s opening toward $77 becomes real again.”