WASHINGTON (DTN) -- Nearby delivery oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange accelerated a rally on Monday. The West Texas Intermediate March contract expired at a fresh 13-month high on the spot continuous chart after a sharp drop in Texas oil production last week and on improving demand fundamentals for diesel fuel. Last week's unprecedented weather event in Texas heightened expectations for an accelerated pace of drawdowns from U.S. oil inventories in the coming weeks.
U.S. crude benchmark notched the largest one-day gain in over a month Monday as traders positioned ahead of expected drawdowns from domestic crude oil inventories after an unprecedented freeze in Texas shut-in an estimated 3.5 to 4 million barrels per day (bpd) of oil output last week. U.S. oil supplies fell in line with the five-year average in mid-February after declining at a quicker pace over the past three out of four weeks so far.
Trafigura Group sees roughly 40 million barrels (bbl) of lost oil output in February, mainly from the Permian Basin, that will not be produced due to the deep freeze, while refined products will likely face a similar volume of lost output, according to Ben Luckock -- co-chair of oil trading at the commodity trading giant. The trading house also estimates about 1 million bpd of crude may never be produced due to the damage some wells incurred from the bizarre weather event. Producers and refiners are expected to face numerous problems to restart operations, in some cases similar to what might be encountered after a hurricane, such as damaged cooling towers and other equipment.
"We have a strong market going into summer," said Luckock in a Bloomberg Television interview. "We're certainly very bullish most of the world is getting out of lockdowns this summer. So, this market has been given an impetus given the events in Texas."
Aside from jet fuel, demand for middle distillates have been steadily improving in recent months due to the strong rebound in the manufacturing sector. Federal Reserve Bank of Dallas said Monday morning factory production in the Eleventh District, which includes Texas, northern Louisiana, and New Mexico, expanded for the ninth consecutive month in February, up more than 10 points from the previous month to a 17.2 reading. The production index, a key measure of state manufacturing conditions, surged 15 points to 19.9, indicating a sharp acceleration in output growth. Other measures of manufacturing activity also suggest a more rapid growth pace from the previous month.
Also lending support for oil futures, the U.S. Dollar Index weakened, settling below 90 at 89.999, in position to test the early year 89.165 32-month low. Monday's dollar weakness was spurred on expectations the House Budget Committee will approve Biden's $1.9 trillion spending bill.
March WTI futures expired at $61.49 bbl, up $2.25, with the April contract settling at a $0.21 premium at $61.70 bbl. April Brent futures on ICE advanced $2.33 or 3.7% to settle above $65 bbl at $65.24. NYMEX March ULSD future surged 3.57 cents to settle at $1.8586 gallon and front-month RBOB contract spiked 3.48 cents to $1.8417 gallon.
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