An unexpected dip in U.S. crude oil inventories helped fuel a surge in energy prices and commodity-related exchange traded funds Wednesday.
On Wednesday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil, was up 2.7% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, was 1.4% higher. USO has declined 22.2% and BNO has decreased 17.5% year-to-date. [Oil ETFs May Rebound Off Oversold Levels]
Oil prices were rallying Wednesday after the U.S. Energy Information Administration revealed crude inventories fell by more-than-expected 4.2 million barrels last week, or over twenty times expectations for a drawdown of 184,000 barrels, Reuters reports.
Nevertheless, oil inventories are at 459.68 million or up 20% year-to-date and only 31 million barrels below April highs.
The sudden drawdown in oil stocks may be fueling short-covering – bearish investors are forced to exit their positions and buy back into the market, which would add further momentum in a rising market.
“Crude oil got a boost after the … crude oil drawdown of 4.2 million when a small build … was expected. The news came just after Brent crude oil reached new six-month lows on Tuesday so (this) could trigger a larger bout of short-covering,” CMC Markets analyst Jasper Lawler said.
Additionally, oil is finding some support after the Dow Jones News Services revealed that Saudi Arabia would cut production by 10.3 million barrels per day.
WTI crude oil futures are now trading around $49.2 per barrel while Brent crude oil futures were hovering around $53.9 per barrel.
“Prices seem to have found the bottom of this rout as prices rebounded off a support of $46.92 and $52.68 for West Texas Intermediate and Brent,” according to Phillip Futures.
Those with a high conviction that the oil market has bottomed may utilize leveraged position on oil futures to capture the potential upside. For instance, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude. On Wednesday, UCO jumped 4.5% and UWTI surged 6.3%. [Investors Capitalize on Oil Swings with Leveraged ETFs]
United States Oil Fund
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Max Chen contributed to this article.