Oil Gains With U.S. Crude Supply Drop Countering Fuel Buildup

Oil closed higher on a surprise decline in U.S. crude inventories, but gains were limited with increased gasoline and diesel supplies underscoring weaker fuel demand.

Futures in New York rose for a third straight day on Wednesday after flipping between gains and losses during the session. A U.S. government report showed domestic crude supplies fell more than 3 million barrels last week. But the data showed fuel supplies rose and gasoline inventories are at the highest since August, highlighting the mixed picture within the petroleum complex.

“The bounce-back in exports and significant decline in imports is driving the draw,” said Rob Thummel, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. Still, “lack of mobility will impact gasoline demand.”

Oil Gains With U.S. Crude Supply Drop Countering Fuel Buildup

Despite the day-to-day fluctuations in headline crude futures, the rally in physical oil prices signals the fundamental strength underlying the market as Asia leads the recovery from the pandemic-induced demand slump. A slew of purchases from Indian and Chinese refiners have lifted crude values from Russia, the Middle East, Latin America and the U.S.

At the same time, other areas of the petroleum markets are signaling strength. Higher diesel prices have lifted the profitability of processing a barrel of light crude into fuels, as diesel consumption has returned to pre-virus levels due to an e-commerce-driven boost in trucking.

“Prices since the beginning November have trended higher, and have made up a lot of ground,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “The faster we get the vaccinations globally, the more that helps the oil narrative.”

Prices
  • West Texas Intermediate for January delivery gained 20 cents to settle at $47.82 a barrel, its highest since late February
  • Brent for February settlement gained 32 cents to end the session at $51.08 a barrel. The contract is at the highest since March

The rise in gasoline inventories comes as indicators of demand for the fuel trend lower. The four-week rolling average for gasoline consumption was down for a fifth straight week and it may weaken further amid expectations for fewer road trips in the U.S. during the Christmas holiday period.

Meanwhile, the mixed outlook for oil has weakened the front end of Brent’s forward curve, which is now on the verge of a bearish contango structure in which nearer-dated contracts trade at a discount to later-dated ones. For comparison, Brent’s nearest contract last week traded at a premium of as high as 18 cents to the following month.

Crude’s rally over the past month and a half also raises concerns over how well the Organization of Petroleum Exporting Countries can keep output in check, while the producer group and its allies move to taper some of their output cuts come January.

“The supply-side of crude will be hard to contain if spot Brent prices remain above the psychological $50 a barrel level,” said Ryan Fitzmaurice, commodities strategist at Rabobank. Higher prices will “test the OPEC+ resolve given the temptation to pump more, especially for the likes of Iraq, Libya and Nigeria that need the revenue badly.”

Other oil-market news:
  • Iran condemned an attack on a tanker at a Saudi Arabian port as a threat to maritime security, in its first official comments on the assault against its regional rival.
  • U.S. drivers are facing the highest pump prices in two months, a consequence of the costlier crude oil used to make the fuel.
  • U.S. onshore oil production from companies that filed for bankruptcy in the last two years is set to decrease about 25% to 600,000 barrels a day from current levels, according to a Rystad Energy research report.

©2020 Bloomberg L.P.

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