Oil Rallies on Supply Worries

NEW YORK (DTN) -- New York Mercantile Exchange oil futures rallied Thursday morning on concerns over a potential short-term supply shortage after a wildfire disrupted Canadian oil sands production and the Energy Information Administration on Wednesday reported an eighth straight weekly decline in U.S. crude output.

The oil market has been extremely volatile in recent days and the futures complex remains vulnerable to a downside turn as the dollar strengthened while weak economic data threatened to curb demand for energy.

At 9:00 AM ET, NYMEX June WTI crude futures rallied $2.25 to $46.03 bbl, near a $46.04 three-day spot high. ICE July Brent futures advanced $2.10 to $46.72 bbl.

In products trade, NYMEX June ULSD futures spiked 5.04cts to $1.3786 gallon, near a three-day spot high of $1.3790. NYMEX June RBOB futures jumped 4.47cts to $1.5313 gallon after inside trade.

Suncor Energy said it reduced production at its facilities in Alberta oil sands due to the wildfire that started on Tuesday and intensified Wednesday. The fire continues to burn around Fort McMurray and an evacuation has been ordered for the 88,000 city population.

Wire reports said the fire has burned 1,600 structures and it could destroy much of the city if it's not contained. Some pipelines in the region are being shut as a precaution, disrupting oil supplies. The volume of the decline was still unclear, although about 50% of Canadian oil comes from the oil sands region, and reports estimate lost output at 800,000 bpd.

The U.S. Energy Information Administration on Wednesday reported that while total domestic crude stockpiles rose by 2.8 million bbl during the week-ended April 29, domestic crude production fell 113,000 bpd to 8.825 million bpd during that time frame.

EIA reported an unexpected gasoline stock build of 536,000 bbl while distillates stocks fell by 1.3 million bbl. Refinery crude inputs, a proxy for crude demand, rose 139,000 bpd for the week profiled, with implied demand for gasoline up 187,000 bpd, but implied demand for distillates down 176,000 bpd.

On Wall Street, equity futures were higher while the dollar rose to a four-day high. The currency trade is generally driven by speculations about central bank policies and there's an ongoing debate when the Federal Reserve will move to increase interest rates.

The Labor Department today said weekly initial jobless claims rose 17,000 to 274,000, the third straight week gain in jobless claims to the highest total in five weeks.

It comes a day before the department releases its April nonfarm payroll report that's expected to show 195,000 new jobs. Payroll firm ADP on Wednesday disappointed the market by reporting 156,000 jobs created for the month. A slowing economy could stifle oil demand.

George Orwel can be reached at george.orwel@dtn.com