This week, crude oil inventories saw a drawdown of -6.014 million barrels, contrasting with the anticipated drawdown of -1.759 million barrels. Gasoline inventories fell by -2.720 million barrels, while distillate inventories reported an increase of +2.343 million barrels, which was above the expected build of +0.928 million barrels.
Cushing inventories went up by 0.419 million barrels over the past week, marking an increase from the previous build of 0.045 million barrels. Meanwhile, the price of crude oil is trading at $62.50, an increase of $0.73 for the day, with the highest and lowest prices recorded at $62.80 and $61.83, respectively.
Market Reaction to Inventory Changes
The market is clearly reacting to the significant crude inventory drawdown, which was over three times larger than what was anticipated. This bullish signal is reinforced by the concurrent drop in gasoline stocks, suggesting robust end-of-summer consumer demand. We believe this strength is partly due to temporary production shut-ins in the Gulf of Mexico from Tropical Storm Valerie last week.
However, traders should be cautious, as the large build in distillates points to potential weakness in the industrial and freight sectors. This aligns with recent economic data, such as China’s July 2025 Caixin Manufacturing PMI which fell to 49.5, indicating a contraction in factory activity. The modest build at the Cushing, Oklahoma delivery hub also adds a slight headwind for front-month futures prices.
Given these mixed signals, we expect implied volatility in options to remain elevated over the next few weeks. Traders might consider using options spreads, such as bull call spreads to express a cautiously optimistic view while defining their risk. This strategy allows for capturing potential upside from tight supply while hedging against a demand-driven downturn.
Outlook for September and October
Looking ahead into September and October, we must account for seasonal tendencies where demand typically softens after the summer driving season concludes. Historically, as we saw in the fall of 2023 when prices fell nearly 20% between September and November, the market can face headwinds if macro concerns take center stage. Uncertainty around the Federal Reserve’s next move, following their rate hike in July 2025, will also weigh heavily on market sentiment.
