Traders Ignore Troubling U.S. inventory Buildups and Propel Crude to Multi-Month Highs

Traders' ability to ignore bad news may be tested within 24 hours by Venezuela's debt payback issue. File Image / Pixabay

Crude traders demonstrated on Thursday demonstrated their ability to focus exclusively on the vaguest hint of good news rather than an abundance of clearly-defined bad news by causing Brent to close at a 27 month high of $59.30 on an 86 cent rise; West Texas Intermediate also rose, by 46 cents, to settle at a six month high of $52.54.

The gains were reportedly spurred by Mohammad bin Salman, crown prince of Saudi Arabia, telling Reuters on Thursday that  "We are committed to work with all producers, OPEC and non-OPEC countries ... We will support anything to stabilize the oil demand and supply."

Rob Thummel, a portfolio manager at Tortoise Capital Advisors, remarked, "When you couple what Mohammed Bin Salman said along with (Russian President Vladimir) Putin, you have to realize we have two of the largest oil producers basically putting a blessing on an extension of production cuts through the end of 2018," referring to Putin agreeing earlier this month of the feasibility of such an extension, even though Organization of the Petroleum Exporting Countries ministers have not committed to doing so.

Traders were apparently not swayed by U.S. Energy Information Administration (EIA) data showing on Wednesday that U.S. crude inventories rose by 856,000 barrels last week compared to an expected 2.6 million barrel draw; U.S. crude production also rose 1.1 million barrels per day (bpd) last week to 9.5 million bpd after a decline due to Hurricane Nate, while U.S. oil exports hit a new record four-week average of 1.7 million bpd.

But as they have demonstrated many times in the past, there's a limit to how much bad news can be ignored before traders send crude prices south again, and the deciding element may be Venezuela, which rattled many investors on Thursday as state-owned PDVSA offered no sign that it will make a critical debt payment of nearly $985 million on Friday.

PDVSA owes another $1.2 billion in principal and interest on another bond, due November 2.

Russ Dallen, managing partner at Caracas Capital Markets, pointed out, "If they default, that means they're defaulting on everything."

When asked if the U.S. is prepared for any fallout that occurs as a result of Venezuela defaulting, U.S. Senator Marco Rubio replied, "The world markets are going to react to that; certainly, their creditors are."

"They do not have an economy, they've made terrible economic decisions."

Indeed, if Venezuela misses its payment deadline, it risks losing control of one of its most valuable assets, Citgo (its U.S.-based refining operation), to Russia.

Earlier this week, Dalton summarized Venezuela's escalating woes by remarking, "This weekend, there's either going to be a lot of bond holders and traders drinking champagne, or there's going to be a lot of stressed fund managers."