WTI Oil Gains as Cushing Supply Drops; Discount to Brent Narrows

May 07, 2014 3:36 pm ET

May 7 (Bloomberg) -- West Texas Intermediate rose after crude supplies at Cushing, Oklahoma, the delivery point for the contract, dropped to the lowest level in more than five years. WTI narrowed the discount to Brent, the European benchmark.

Futures climbed 1.3 percent in New York. Cushing stockpiles fell 1.4 million barrels to 24 million last week, the U.S. Energy Information Administration said. Nationwide stockpiles unexpectedly slipped 1.78 million barrels last week. Total fuel demand averaged over four weeks increased to the highest level since March.

“The market is down because there were decent-sized declines in stocks,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $115 billion of assets, said by phone. “It’s a sign demand is picking up and investors want to price it in.”

WTI for June delivery increased $1.27 to close at $100.77 a barrel on the New York Mercantile Exchange. It was the highest settlement since April 29. The volume of all futures traded was 27 percent above the 100-day average at 2:54 p.m.

Brent for June settlement rose $1.07, or 1 percent, to close at $108.13 a barrel on the London-based ICE Futures Europe exchange. Volume was 40 percent higher than the 100-day average.

The European benchmark crude closed at a $7.36 premium to WTI, the narrowest since April 28.

Supplies Shrink

The decrease left nationwide U.S. stockpiles at 397.6 million barrels in the week ended May 2, according to the EIA, the Energy Department’s statistical arm. Crude supplies were projected to rise 1.25 million, according to the median estimate of 10 analysts surveyed by Bloomberg.

“WTI is getting strength from the decline at Cushing, which could change the market structure,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “We’re seeing strong demand from consumers. Refinery demand should increase as they boost fuel output.”

U.S. crude production declined 2,000 barrels a day to 8.35 million, the EIA said. Output climbed to 8.36 million barrels a day in the week ended April 18, the most since 1988 as a combination of horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies trapped in shale formations.

Refineries operated at 90.2 percent of capacity in the seven days ended May 2, down 0.8 percentage point from the prior week. Operating rates usually increase in late spring and have peaked in July during the past five years as refiners prepare for the summer months when many Americans take vacations and gasoline use climbs.

Fuel Stockpiles

Gasoline stockpiles increased 1.61 million barrels to 213.2 million last week, the report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, fell 447,000 to 114 million.

Federal Reserve Chair Janet Yellen said today in testimony to the Joint Economic Committee of Congress that she believes the economy still requires a strong dose of stimulus five years after the recession ended because unemployment and inflation are well short of the Fed’s goals.

“Yellen’s testimony helped a little bit,” Haworth said. “Continued stimulus is supportive for oil.”

President Vladimir Putin said Russian troops pulled back from the Ukrainian border, a claim disputed by the U.S. and NATO. He also urged separatists in the country’s south and east to postpone planned May 11 plebiscites over regional autonomy. Putin also said violence must stop for any dialogue to begin, and voiced support for the presidential election Ukraine plans to hold on May 25, which Russia has previously criticized.

Discussing Sanctions

Ukraine and its U.S. and European allies have said Russia, the world’s biggest energy-exporter, is fomenting unrest in eastern areas, and warned that Putin may follow his annexation of Crimea with another land-grab against his neighbor. The U.S. is discussing a third round of sanctions with the European Union that may target financial, energy or mining industries.

Implied volatility for at-the-money WTI options expiring in June was 17 percent, down from 17.7 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 556,004 contracts at 2:58 p.m. It totaled 534,900 contracts yesterday, 0.4 percent below the three-month average. Open interest was 1.64 million contracts.