A stronger dollar, supported by hopes for more stimulus to boost the world's largest economy, also weighed on oil prices.
Saudi Arabia this week pledged extra, voluntary oil output cuts of 1 million barrels per day (bpd) in February and March as part of a deal under which most OPEC+ producers will hold production steady during new lockdowns. The oil report pointed to a 5.82-million-barrel decline in inventories for the week ending January 8th, compared to a baseline forecast of a 1.66-million-barrel drop.
Falling inventories and rising oil prices are likely to tempt USA drillers back into the fray, especially as Saudi Arabia and other major producers cut their output, effectively ceding market share to American producers.
"People are realizing the market is tighter than it has been in a while and that the commitment by Saudi Arabia to cut back production is going to keep the market balanced despite the concerns about shut-ins from COVID", said Phil Flynn, senior analyst at Price Futures Group in Chicago. President-elect Joe Biden will unveil a new stimulus plan on Thursday, which will be closely eyed by commodity and currency traders for clues on future spending and inflation outlooks. Malaysia has declared a state of emergency on Tuesday after imposing a 14-day lockdown in key areas. In Shijiazhuang, the provincial capital and epicenter of the new outbreak, people and vehicles are barred from leaving, as authorities seek to rein in the spread. WTI rose to its highest in almost a year on Friday.
Crude inventories in the USA dropped by 5.8 million barrels last week to around 484.5 million barrels, data from the American Petroleum Institute showed late on Tuesday.
Oil also gained on expectations for a drop in U.S. crude stockpiles. If inventories continue to decline towards their normal levels, oil will get additional support.
Analysts said oil prices could see a correction in the coming months if fuel demand remains constrained by the pandemic.
WTI turns south after closing previous four days higher. Further stretching beyond the upper Bollinger Band could hint at short-term pullback however, as prices appear to be temporarily overbought.