Oil Futures Up on Sizable Gasoline Draw

OLD BRIDGE, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude oil on the Intercontinental Exchange settled higher Wednesday following reaction to Wednesday's Energy Information Administration report showing a larger-than-expected draw in gasoline inventories even as U.S. oil production continued to grow.

Today's EIA report showing a 3.8-million-barrel (bbl) draw in gasoline stocks versus an earlier estimate from the American Petroleum Institute for a 3.369-million-bbl draw took the market by surprise, causing traders to focus on the purchase of spot gasoline and distillate contracts as a hedge against the likelihood of further price advances.

The 3.8 million bbl draw in gasoline supply lowered inventory to 232.0 million bbl for the week profiled, widening the decline against year ago to 8.7 million bbl, or 3.6%.

Distillate fuel supply edged down 100,000 bbl to 114.9 million bbl during the week-ended May 11, which was less than an API reported 768,000 bbl supply draw, although it marked the sixth straight weekly drop in inventory. Distillate fuel stocks are 31.9 million bbl, or 21.7%, below the year-ago supply level.

At the 2:30 p.m. EDT settle, NYMEX June WTI futures rose 18 cents to $71.49 bbl, with ICE July Brent up 85 cents to $79.28 bbl, coming up just short of Tuesday's $79.47 trade -- its highest spot price in more than three years. NYMEX June RBOB futures were 4.51 cents higher with a $2.2499 gallon settlement, led by EIA's reported gasoline draw, and the June ULSD contract rose a little more than 2.0 cents to $2.2692 gallon.

"Well as you can see gasoline went out strong as (draws were) well above expectations, and crude oil exports are at record levels of 2.5 million barrels a day. That is your new oil reality," said David Thompson, executive vice president of Washington, D.C.-based PowerHouse, a commodity hedge and trade advisory. "We remain bullish on diesel as we pushed above the $2.15 level, so now we now expect distillates to lead the way."

EIA did show a 1.4-million-bbl draw in commercial crude supply for the week reviewed to 432.4 million bbl, countering a 4.854-million-bbl build reported late Tuesday afternoon by the API. The draw came despite a 1.5-million-bbl decline in Strategic Petroleum Reserve stocks to 662.0 million bbl.

EIA calls for solid growth in U.S. crude production were echoed in the overnight International Energy Agency report which cited higher oil prices as prompting producers to grow output by 120,000 barrels per day (bpd) to 1.73 million bpd this year. IEA now expects U.S. production of crude, condensate, natural gas liquids, and nonconventional oil to average 21.99 million bpd in 2018.

"Climbing U.S. production," IEA said, "will be an important contribution to compensating for lower volumes from elsewhere."

Supplies from Venezuela are expected to continue to decline as ConocoPhillips has threatened to seize PDVSA assets in the Caribbean. A combination of reduced Venezuelan exports combined with a decline in Iranian oil exports, may create what some traders are calling a "perfect cocktail" for oil to hit $100 bbl this year or next.

Brian Whary can be reached at brian.whary@dtn.com