By Barani Krishnan

Investing.com — On Wednesday oil prices rose almost 6%, climbing for the fourth time in four sessions. They also fell by nearly two-thirds on the week as benign inflation data indicated that the Federal Reserve may not be too aggressive in raising rates, which could lead to the U.S. economic downturn.

The data showing that crude oil inventories were seven times greater than expected and their highest level in just four weeks did not deter the bulls who are determined to return to the market. 

The focus instead was on last week’s outsized drawdowns in gasoline, as well as the distillates used for producing the diesel required for trucks, buses, trains and ships as well as fuel for jets.

New York-traded WTI (the benchmark U.S. crude oil) was at $106.11, up 6.4% by 1:00 ET (17:00 GMT). 

WTI dropped almost 9% this week. WTI hit $98.65 for the second consecutive week. This was due to fears that the United States could fall into recession as a result of aggressive Fed rate rises. Fed officials are determined not to allow inflation growth at its highest pace in over 40 years.

Crude, the London-traded international benchmark oil price, rose $5.50 or 5.4% to $107.96 per barrel. 

Like WTI, Brent had also fallen 9% on the week prior to Wednesday’s rebound, hitting a two-week bottom of $101.31.

“The volatility in crude is staggering as the market is being pulled in both directions; one side by fears of a U.S. recession and the other side by exuberance over the implied demand for fuel ahead of the summer,” said John Kilduff, partner at New York energy hedge fund Again Capital.

The U.S. grew 8.3% over the past year, slightly less than the 8.5% annual growth recorded in March, while maintaining inflation at the low end of the four-decade highs.

“We’re in the process of rolling over from extremely high year-on-year inflation but the shape of that curve is in question,” economist Adam Button said in a post on the ForexLive platform. “Will it be a swift return to 2% inflation or a long, slow process?” 

Fed’s main focus is on the possibility of inflation returning to 2.2%. The central bank has penciled in seven rate hikes this year — the maximum possible under its calendar of monthly meetings in 2022 — and more rate revisions next year to achieve that 2%.

Investors find it more difficult to understand the Fed’s monthly rate hikes. The central bank officials are still debating whether a 75-basis point rise in June is possible after the recent rate hikes of 50 and 25bps in May and March respectively. A 75-bps rate hike would mark the biggest upward adjustment since 1994.

Apart from the positive consumer price print of April, crude oil prices also saw an increase due to the Energy Information Administration (EIA) weekly oil inventory data.

The Biden administration pulled a record 7 million barrels of crude from the U.S. Strategic Petroleum Reserve, or SPR, last week, as it kept up with unrelenting draws from the nation’s oil reserve in a bid to bridge a supply deficit and cool all-time highs in fuel prices.

The SPR’s stockpile for the week ended May 6 stood at 543 million barrels from a previous 550 million, which was already the lowest reserve level in 20 years, the EIA said in its Weekly Petroleum Status Report. 

The EIA report, released each Wednesday, showed that the Biden administration has taken 3 million barrels on the average out of the SPR every week over the past two months to help meet domestic refiners’ demand for crude. 

Global oil supplies are estimated to be in a deficit of five to seven million barrels per day versus demand, largely due to Western sanctions against Russia — one of the world’s largest energy exporters. The market is also in deficit due to a surplus in fuel consumption and strong economic recovery following the coronavirus pandemic, which lasted two years.

In November, as oil supply began to tighten amid rising demand for oil, the Biden administration made its first major SPR withdrawl. 

Last week’s SPR draw was, however, more than double the weekly trend as the administration entered an era of accelerated reliance on the reserve — amid average pump prices of gasoline standing at all-time highs of $4.37 per gallon versus the year-ago average of $2.99.

For May through July, the administration has scheduled an SPR release of 180 million barrels — effectively one million barrels a day over 180 days.

According to the EIA, while the SPR stockpile dropped by 7,000,000 barrels last week the commercial level rose by 8.5 million barrels. It might seem that crude oil from the reserve was being transferred directly to commercial inventories, but this is not the case. The EIA, however, says there’s a one-week lag in accounting between the two. 

Notwithstanding the crude draw, consumption of fuel products remained strong last week, with gasoline inventories seeing a slide of 3.61 million barrels versus a forecast draw of 1.6 million barrels and the previous week’s usage of 2.23 million barrels. Gasoline, known as petrol outside of the United States, is America’s premier automobile fuel product.

Stockpiles of distillates fell by 913,000 barrels last week versus forecasts for a draw of 1.0 million, after the previous week’s consumption of 2.34 million. 

For months distillates have seen the most steady inventory drops since January, making them the largest growth segment of the U.S. crude oil industry. Diesel pump prices have reached record levels, with an average $5.55 per gallon, as opposed to the $3.13 year ago.

“The Biden administration is determined to use the SPR to the hilt to beat back the inflation in fuel. The reality is we aren’t seeing much reduction in what Americans are paying at the pump,” said Kilduff of Again Capital.

Despite crude’s drop from March highs of above $130, the retail price of gasoline has remained stubbornly at or above $4 per gallon over the past two months, prompting President Joe Biden to accuse energy firms of price-gouging at the pump.