West Texas Intermediate crude surged to a 15-month high after U.S. stockpiles tumbled for a second week. WTI’s discount to Brent narrowed to less than $2 for the first time since December 2010.
Oil advanced 2.9% after the Energy Information Administration said supplies fell 9.87 million barrels, three times as much as projected in a Bloomberg survey. WTI has moved into backwardation, with futures closest to expiration more expensive than those for later delivery. The gain accelerated as minutes from a Federal Reserve meeting showed many officials want employment to pick up before slowing stimulus.
“There’s no incentive to hold supplies with the market in backwardation,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “You are seeing big drops in inventories and that should continue.”
WTI crude for August delivery climbed $2.99 to $106.52 a barrel on the New York Mercantile Exchange, the highest settlement since March 27, 2012. The volume of all futures traded was double the 100-day average at 3:44 p.m. The August contract was 90 cents more expensive than the September one, the steepest premium since October 2008.
Brent oil for August settlement increased 70 cents, or 0.6%, to end the session at $108.51 a barrel on the London- based ICE Futures Europe exchange. The volume for all contracts was 35% above the 100-day average.
Disappearing Discount
The U.S. benchmark’s shrinking discount to its European counterpart, Brent from the North Sea, underlines the easing of a supply bottleneck in the U.S. The spread widened to as much as $23.44 a barrel on Feb. 8 before contracting to as little as $1.82 today. It was $1.99 at the settlement.
U.S. crude stockpiles have fallen 20.2 million barrels, or 5.1%, to 373.9 million in the last two reports, the biggest two-week plunge since at least 1982, according to EIA, the Energy Department’s statistical unit. Supplies surged to 397.6 million on May 24, the highest level since 1931.
“WTI is the leader now,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The last two reports have been real eye-openers. You’ve had two massive supply declines and there’s a lot of speculative interest entering the market.”
The report was forecast to show a 3.2 million-barrel drop, according to the median of 11 analyst surveyed by Bloomberg.
Rising Production
Crude production rose 1.8% to 7.4 million barrels a day last week, the most since January 1992, the EIA said. Output has surged as the combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in the central part of the country.
Stockpiles at Cushing, Oklahoma, the delivery point for WTI crude dropped 2.69 million barrels to 47 million last week, the report showed. Supplies reached a record 51.9 million barrels in the week ended Jan. 11.
“We’re seeing a reordering at Cushing, which is very supportive to WTI,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund that focuses on energy. “Cushing is no longer a bottleneck as new delivery routes have become available because of investment in pipelines and rail.”
Refineries operated at 92.4% of capacity, up 0.2 percentage point from the prior week and the highest level this year. Utilization rates usually peak during the summer months when U.S. gasoline demand rises. Production of the motor fuel climbed 2.2% to 9.59 million barrels a day, the highest level since August 2010.
“Production keeps climbing but refiners are obviously doing a good job working their way through it,” Schork said.
Fuel Stockpiles
Gasoline stockpiles unexpectedly fell 2.63 million barrels to 221 million. Inventories of distillate fuel, a category that includes heating oil and diesel, advanced 3.04 million to 123.8 million. Supplies of both gasoline and distillate fuel were projected to advance 1 million barrels in the Bloomberg survey.
Consumption of gasoline increased 1.8% to 9.08 million barrels a day averaged over the last four weeks, the highest level since August, the report showed.
Gasoline for August delivery increased 8.89 cents, or 3%, to $3.0149 a gallon on the Nymex, the highest settlement since April 2.
“Everything is going for the market right now,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund that focuses on energy. “Refineries are operating at higher rates, which is increasing demand for crude. At the same time, gasoline demand is up above 9 million barrels a day for the first time in a long while.”
Fed Minutes
The minutes from the Federal Open Market Committee’s June 18-19 meeting show officials want to see that employment is improving before reducing the pace of $85 billion in monthly bond purchases.
“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” according to the record of the Fed gathering released today in Washington.
The dollar fell against the euro after the release of the minutes, bolstering the appeal of commodities denominated in the U.S. currency as an investment. The dollar slipped as much as 1.3% against the common currency. The Standard & Poor’s GSCI Index of 24 raw materials reached 644.62, the highest level since April 3, led by gains in gasoline and WTI.
Technical Indicator
The U.S. benchmark oil extended its rally after breaching a technical resistance level on the weekly chart, according to data compiled by Bloomberg. Futures settled above $103.39 a barrel, the 61.8% Fibonacci retracement of the decline to $32.40 in December 2008 from an intraday record high of $147.27 in July that year. Investors typically buy contracts when prices exceed technical resistance.
Implied volatility for at-the-money WTI options expiring in September was 23.5%, up from 22% yesterday, data compiled by Bloomberg showed.
Electronic trading volume on the Nymex was 1.11 million contracts as of 3:44 p.m. It totaled 794,959 contracts yesterday, 22% above the three-month average. Open interest was 1.82 million contracts.
