Crude went into retreat mid-morning after the U.S. Department of Energy announced that its weekly oil inventory count jumped by 1.3 million barrels - quite the opposite of the 1.9-million-barrel drop the Street had anticipated.
The news immediately sent oil prices downward, shedding more than $1.50 (U.S.) a barrel in a matter of minutes and leaving crude down $1 from Tuesday's close. The market has since recovered some of those losses, but oil remains down 21 cents at $81.56 a barrel in New York.
Clearly, that's not a major selloff. But more important is the fact that the inventory data represent an about-face from the assumptions that had been driving oil's rally of the past two weeks, which had added 13 per cent to the price of crude.
The rally had been underpinned by extreme cold weather in many parts of the United States, as well as other key consuming countries such as China. The assumption was that the cold snap had escalated demand for oil for heating, draining inventories in the process.
But the DOE data show that supplies in the U.S. market - the world's biggest energy consumer - have managed to continue to swell despite the demand spike from the cold weather, at least for a week.
As a result, not only has the major impetus for oil's rally been brought into serious doubt, but investors now have to wonder what the surprise inventory build says about the state of underlying demand, outside of unusual weather events. It's certainly reason enough to consider unwinding some of the gains of the past two weeks.
