Oil Futures Surge on Run Rate Plunge

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange settled Wednesday's session sharply higher, with the U.S. crude benchmark notching a 2.5% advance. The gains came on speculation the Organization of the Petroleum Exporting Countries and Russia-led partners would decide to extend production curbs for another month at their meeting Thursday. The oil complex was further bolstered by a large drop in U.S. product stocks during the final week of February as refiners struggle to bring units back online following forced shutdowns caused by Winter Storm Uri.

The OPEC+ technical committee meeting held this week did not offer any guidelines for April output levels, although there's growing speculation the 23-member alliance would rollover 7.01 million barrels per day (bpd) in production cuts through next month.

OPEC+ in 2020 sharply reduced production in response to the COVID-19 pandemic and was set to bring 2 million bpd back online Jan. 1, but instead limited the output increase to 500,000 bpd. In early January, OPEC+ agreed to hold off adding new production except for 75,000-bpd monthly increases in February and March by Russia and Kazakhstan, with Saudi Arabia pledging a unilateral 1 million-bpd production cut for both months.

Following the runup in crude prices so far in the first quarter, alongside lost U.S. production amid an unprecedented winter storm in Texas and surrounding regions that forced freeze offs and possibly damaged stripper wells in the Permian Basin, there appears to be temptation by OPEC+ producers to agree to lift their oil production Thursday.

"We must emphasize in strong terms: cautious optimism, cautious optimism, cautious optimism," OPEC'S Secretary-General Mohammad Barkindo said this week ahead of Thursday's meeting, with the technical committee noting global oil demand is still under pressure amid pandemic lockdown measures in parts of the world, while jet demand remains severely constricted.

Those concerns are highlighted by recent economic data from the Eurozone, where governments continue to resort to quarantine shutdowns to ease the spread of virus mutations amid lackluster vaccine rollout campaigns. Eurozone's final Purchasing Managers' Index for February came at 48.8, marking the fourth consecutive month of contraction in business activity.

In China, the world's largest crude importer, the manufacturing activity slowed to the lowest reading since May of last year at 50.6, marking the third consecutive month of a falling PMIs. The nonmanufacturing PMI slipped to its lowest level in six months, coming in at 51.4 in February, down from 52.4 in January. These data points raise concerns that China's recovery may have stalled in the new year.

Domestically, Winter Storm Uri prompted severe disruptions across the petroleum complex in the South-Central U.S., with Wednesday's inventory data from the Energy Information Administration showing a record 22.6 million-barrel (bbl) build in domestic crude stocks and combined 23.3 million-bbl draw for refined fuels. U.S. refinery runs tumbled 12.6% from the previous week to 56% -- the lowest rate on record, with EIA data going back to 1990.

With refiners struggling to recover from the Arctic blast, such distortions in petroleum industry may linger for a while now, according to the analysts.

On Wednesday, NYMEX West Texas Intermediate April crude surged $1.53 to settle at $61.28 per bbl, and Brent crude futures for May delivery closed out the session just above $64 per bbl. NYMEX April ULSD contract rallied 2.76 cents, or 1.45%, to $1.8357 gallon, and front-month RBOB gained 1.54 cents to $1.9518 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges