Crudes, RBOB End At New Highs

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled sharply higher Wednesday, with West Texas Intermediate ending at a fresh multiyear high on the spot continuous chart ahead of the May contract's expiration Friday afternoon following the release of weekly U.S. oil statistics.

Data released midmorning by the Energy Information Administration for the week-ended April 13 showed across the board drawdowns for the crude, gasoline and distillate headline categories, while total commercial crude and oil products inventory dove 10.5 million bbl to a 1.181 billion bbl three-year low and below the five-year average.

The move below the five-year average is more than just symbolic, providing a demarcation between a global oil supply glut that crashed oil prices in 2014 and the transition to a tighter supply-demand disposition that can be a launch pad for oil prices amid supply disruptions or geopolitical developments.

Consider U.S. commercial crude oil inventory that reached an all-time high of 535.5 million bbl in ending the first quarter 2017 was tallied at 427.6 million bbl on April 13, according to EIA data. In mid-April, commercial crude supply was 104.8 million bbl or 19.7% less than a year ago.

The United States is one of the 35 countries that make up the Organization for Economic Cooperation and Development, with a production cut agreement by 24 oil producing countries measuring their success by erasing a surplus in commercial oil supplies above the OECD five-year average. Late last week, the International Energy Agency said OECD inventory could move to parity or even slip below the five-year average in May.

In recent weeks, Saudi Arabia said the Organization of the Petroleum Exporting Countries and their 10 on-OPEC oil producing partners in the production scheme would consider adjusting the success of their cuts by erasing OECD supply above the seven-year average. The agreement reducing production by the parties runs two years through the end of 2018.

In addition to production cuts, greater-than-expected oil demand in the United States and globally amid robust world economic growth helped to reduce the global supply overhang.

Gasoline demand in the United States reached a record high of 9.857 million bpd during the second week of the second quarter, according to the EIA, up a sizeable 584,000 bpd on the week. In 2018 through April 13, implied gasoline demand at 9.145 million bpd outpaced the year-ago period by 298,000 bpd or 3.4%.

Distillate demand remains strong, up 186,000 bpd to 4.356 million bpd during the week reviewed, with total demand for oil products averaging 20.667 million bpd this year through April 13, up 1.041 million bpd or 5.3% compared with year prior.

At 10.54 million bpd, U.S. crude oil production reached a fresh record high for the eighth consecutive week through April 13, with sharp growth in tight oil production the force behind the better-than three-year oil surplus. EIA projects U.S. shale oil production will increase by 125,000 bpd in May to 6.996 million bpd, with domestic oil production averaging 10.7 million bpd this year.

Yet the growth is being driven by light crude oil gains primarily in the Permian Basin, which currently lacks takeaway pipeline capacity to keep up with new production. Oil prices at the wellhead in west Texas and New Mexico are at a steep discount to Houston the EIA and IEA recently noted.

Morgan Stanley threw more cold water on projected growth in the red-hot Permian region, pointing to the light oil quality. Refiners in the Gulf Coast have an appetite for heavy crude oil based on their design, and have blended the light oil into the heavy to process through their refineries. Heavier crudes also have a greater yield, including for distillate fuels. Analysts with Morgan Stanley project U.S. refiners are nearing the top end of their capacity in processing the light oil grades.

NYMEX May WTI futures settled up $1.95 at $68.47 bbl, the highest settlement on the spot continuous chart since Dec. 1, 2014, with the June contract ending at parity ahead of the May contract's expiration Friday afternoon.

ICE June Brent crude settled at $73.48 bbl, the highest settlement on the spot chart since Nov. 26, 2014. An increasing number of analysts expect Brent crude to top $80 bbl by June 30.

NYMEX May RBOB futures settled up 2.71cts at $2.0683 gallon, the highest settlement on the spot chart since Aug. 31, 2017, when Hurricane Harvey was disrupting supply along the Texas coastline. NYMEX May ULSD futures settled up 3.4cts at $2.0911 gallon, and have since traded at a $2.1038 gallon better-than 2-1/2 month high on the spot continuous chart.

Brian L. Milne can be reached at brian.milne@dtn.com

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