WTI at 3-1/2 Year High

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange continued higher at settlement Wednesday. The August West Texas Intermediate crude futures contract soared to a 3-1/2 year high, as Wednesday's Energy Information Administration supply report revealed U.S. crude oil stocks dropped to a five-month low while exports reached a record high for the week ended June 22.

WTI crude oil futures, already advancing before the EIA report, settled $2.23 higher at $72.67 bbl, its highest settlement on the spot continuation chart since Dec. 5, 2014.

The advance in WTI outpaced the gain in Brent futures, with the August contract, which expires Friday, settling up $1.31 to $77.62 bbl, while September Brent increased $1.32 to $77.46 bbl.

EIA data showed U.S. crude supplies fell for a third consecutive week by a larger-than-expected 9.9 million bbl to 416.6 million bbl, and have been drawn down 20.0 million bbl or 4.6% since June 1.

Several factors joined to prompt the sizeable crude draws in June, including record high refinery crude inputs and exports, with EIA reporting crude inputs up 115,000 bpd last week to 17.816 million bpd, with the refinery run rate up 0.8% to 97.5% of capacity. U.S. crude exports soared 626,000 bpd on the week to 3.0 million bpd, which compare with an export rate for the comparable week a year ago at 528,000 bpd.

"The market is reacting to record refinery inputs to the crude distillation units in conjunction with record weekly crude oil exports resulting in a greater-than-expected inventory draw," said Andy Lipow, president of Houston-based Lipow Oil Associates. "When you combine this data with Canadian and Libyan production outages and with sanctions that are impacting the availability of Iranian crude oil, I expect the market to continue to move higher."

Draws from U.S. commercial crude inventory are expected to continue, especially at Cushing, Oklahoma, the delivery location for the WTI contract, following the June 20 shut down of a 360,000 bpd upgrader near Fort McMurray that is seen offline through the end of July. In Libya, recent fighting by rival militant groups had closed two key export ports with an estimated 650,000 bpd of capacity, with Libyan crude oil production at 955,000 bpd in May.

On Tuesday, U.S. President Donald Trump in a tweet told countries to stop buying Iranian oil, with U.S. imposed sanctions set to take effect in November following the U.S. withdrawal from the Iranian accord in May. The International Energy Agency said the re-imposed sanctions could have a similar effect on Iranian exports as they did in 2012 through 2015 before they were lifted with the Iranian nuclear accord, when 1.2 million bpd of exports were knocked out of the market.

As demand for U.S. crude climbs, the WTI-to-Brent spread has narrowed significantly, ending the session at $4.86 bbl, the smallest WTI discount since mid-April. The spread still shows an incentive for foreign buyers to purchase U.S. crude.

And while at a record 3.0 million bpd, there are limitations in how much more crude could be exported due to infrastructure restraints. Lipow said the biggest impediment to further U.S. export gains is pipeline takeaway capacity out of the Permian Basin of west Texas. "We could achieve exports of 5 million bpd by the end of 2019 once the pipeline capacity is expanded, though we have port capacity for that level today (Wednesday)," Lipow said.

As refinery runs soared, gasoline stocks registered its third straight weekly build, up 1.2 million bbl to a 241.2 million bbl three-month high for the week profiled, even as implied gasoline demand rose 405,000 bpd to 9.731 million bpd.

The EIA also reported record high distillate exports of 1.836 million bpd, up from the prior week's 1.304 million bpd, with distillate supply flat last week at 117.4 million bpd.

Drawn higher by WTI futures, NYMEX July RBOB futures settled up 5.9 cents to $2.1336 gallon, its highest settlement since June 1, while August RBOB settled 5.36 cents higher to $2.1103 gallon. July ULSD futures settled up 4.82 cents to $2.1772 gallon, while the August USLD contract settled at $2.1796, 4.71 cents higher on the day.

The July RBOB and USLD futures contracts expire at Friday's close.

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