Oil Futures Rally Wednesday

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange moved sharply higher early Wednesday following bullish inventory data released late Tuesday and ahead of weekly statistics from the Energy Information Administration (EIA), with the morning price surge following Tuesday's downside test of initial support.

The American Petroleum Institute (API) late Tuesday afternoon reported a 1.047 million barrel (bbl) drawdown from U.S. commercial crude inventory during the week ending April 13, with 1.015 million bbl of the decline taking place at the Cushing supply hub in Oklahoma. API reported a 2.473 million bbl decline in gasoline supply and an 854,000 bbl draw from distillate fuel inventory for the week reviewed.

EIA data is scheduled for release at 10:30 a.m.ET.

Rallying oil prices off February lows have been supported by a series of factors and events, with this month's surge in crude prices to multiyear highs generated by geopolitical events in the Middle East. Underpinning the upside has been bullish fundamentals, with oil demand in the United States and globally outpacing previous expectations so far this year amid broad-based economic growth.

Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and 10 non-OPEC oil producers including Russia now in the second year of a two-year term have combined with robust oil demand to drain a wide overhang in commercial oil supply held by advanced economies, which is expected to be erased as early as May.

Countering the bullishness is the ongoing ramp up in U.S. crude production, which has increased by more than 1.0 million barrels per day (bpd) since the first week of 2018 to a 10.525 million bpd record high. The sharp growth rate in domestic output is seen continuing through the second quarter, with Baker Hughes reporting oil companies added 68 rigs this year, 18 of which were reactivated during the first two weeks of April. Producers are hedging at record levels, insulating them, at least in the short run, from a price crash.

However, there are cracks in the outlook for U.S. oil production that could slow output. Both EIA and the International Energy Agency in their monthly outlooks released last week said pipeline capacity from the Permian Basin in west Texas and New Mexico is at capacity, with new capacity to alleviate the congestion not expected online until 2019. Permian Basin has been the primary driver in boosting U.S. oil production. Oil prices at the wellhead are holding sharp discounts to West Texas Intermediate in Houston. Moreover, the oil produced in the Permian is chiefly very light.

"Morgan Stanley is the latest to warn that refiners have hit the shale wall," said Phil Flynn, senior market analyst with The PRICE Futures Group.

The Chicago-based analyst noted in a morning report today that, "U.S. refiners were built for heavy crude and the light shale crude is too light and does not yield enough heavy product, like diesel for example."

EIA expects U.S. oil production to average 10.7 million bpd in 2018. On Monday in its Drilling Productivity Report, EIA projected shale oil production would increase by 125,000 bpd in May to 6.996 million bpd, with the Permian accounting for 73,000 bpd of the increase for output from the region at 3.193 million bpd.

At 9:00 a.m.ET, May WTI futures were up $1.26 and the June contract gained $1.27, holding parity at $67.78 bbl ahead of the May contract's expiration Friday afternoon. WTI futures rallied to a fresh three-year, four-month spot high at $68.08 bbl in early trading.

ICE June Brent crude futures jumped $1.17 to $72.75 bbl, with an increasing number of analysts projecting the international crude benchmark to reach $80 bbl this quarter.

NYMEX May RBOB futures were 2.06 cents higher at $2.0618 gallon, with May ULSD futures up 2.58 cents at $2.0829 gallon.

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

(BE)

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