Oil prices rallied Thursday as demand expectations rose on strong U.S. economic growth and stimulus in China, while the supply side tightened on falling crude inventories due to winter storms.
The West Texas Intermediate contract for March rose $2.27, or 3.02%, to settle at $77.36 a barrel. The Brent contract for March gained $2.39, or 2.99%, to settle at $82.43 a barrel.
WTI is up nearly 8% this year while Brent has gained 7%, a solid start to 2024 after the two benchmarks fell more than 10% last year.
U.S. crude breaking above $76 a barrel should confirm that oil's immediate trend has moved to the upside, according to Matt Maley, chief market strategist with Miller Tabak. The next catalyst will be if WTI can break above the 200-day moving average of $77.65, Maley said.
U.S. crude breaking out would be good for energy stocks, which have lagged WTI futures prices since mid-December, Maley said. If crude oil confirms a change in trend, energy stocks will have to play catch up, he told CNBC.
WTI should really be priced at $85 a barrel given the geopolitical risk to global crude supplies in the Middle East right now, according Robert Thummel, portfolio manager at Tortoise.
Economic growth, supply disruptions
Oil prices rallied after U.S. fourth-quarter growth came in hot on Thursday at 3.3%, trouncing Wall Street expectations of 2%.
And China promised Wednesday to reduce the amount of liquidity its banks are required to keep on hand in an effort to boost the country's faltering economy. The looser reserve requirements will free up $139.8 billion in long-term capital, according China's central bank.
While Beijing has not brought out a bazooka yet, the hope is that the stimulus can at least stem the tide of weakening demand in China, Maley said.
"The two largest oil consumers in the world could likely have some pretty strong demand this year," Thummel said.
The supply side, meanwhile, has grown tighter with commercial crude stockpiles in the U.S. declining by 9.2 million barrels during the week ended Jan. 19, according to the Energy Information Administration. The stockpile decline is due to U.S. production taking a hit from a winter storm earlier this month, according to John Evans with PVM Oil Associates.
U.S. production declined by 1 million barrels per day to 12.3 million bpd last week, according to estimates from the EIA. North Dakota, the third largest crude producing state in the U.S., got hit particularly bad by the winter weather with production falling 700,000 bpd at the worst point last week.
The winter storm has led to the largest weather-related disruption to crude since Hurricane Ida in 2021, according to Ryan Grabinski, an analyst with Strategas Securities.
"All indications suggest this production disruption will be short lived barring a prolonged period of cold weather," Grabinski told clients in a Thursday note.
The drop in U.S. stockpiles and China stimulus help ease traders' fears, at least for now, that oil supply is outstripping demand as North America pumps crude at record levels while the world's second-largest economy slows.
Tensions also remain high in the Middle East as Houthi militants attacked a U.S.-flagged container ship transiting the Gulf of Aden on Wednesday. The U.S. launched airstrikes against the Houthis in Yemen and Iran-allied militants in Iraq this week.
Traders and analyst are monitoring the situation in the Middle East closely for signs that the conflict might disrupt crude supplies.
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This article has been updated to correct the name of the Energy Information Administration.