Mark Shenk, 25 February 2016

Crude oil advanced as cheap gasoline bolstered US demand for the motor fuel and sent inventories lower.

Gasoline supplies fell 2.24 million barrels to 256.5 million, according to the Energy Information Administration. Demand rose as US pump prices lingered near a seven-year low. Crude stockpiles climbed to an 86-year high while production dipped. Prices dropped earlier after oil ministers from Iran and Saudi Arabia signalled on Tuesday that they’re not willing to curtail production.

“Crude is feeling the impact of the drop in product inventories,” said John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy. “Gasoline inventories dropped and demand is pretty strong. Low prices are encouraging driving, which is helping with demand.”

Crude is down about 13 per cent this year on speculation the global glut will linger after the Organisation of Petroleum Exporting Countries abandoned output targets in early December. Iran is seeking to boost production by 1 million barrels a day in 2016 after sanctions were lifted last month.

West Texas Intermediate for April delivery rose 28 cents, or 0.9 per cent, to settle at $US32.15 a barrel on the New York Mercantile Exchange. The contract fell as much as 4.1 per cent to touch $US30.56 before release of the report at 10.30am in Washington. Total volume traded was 22 per cent above the 100-day average at 2.53pm.

Brent for April settlement increased $US1.14, or 3.4 per cent, to $US34.41 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $US2.26 premium to WTI, the most since December.

Gasoline demand rose 1.8 per cent to 9.06 million barrels a day through February 19, averaged over four weeks. Consumption was up 5.2 per cent from the same period last year.

March gasoline futures rose 4.6 per cent to $US1.0104 a gallon, the highest settlement since February 12. Diesel advanced 3.7 per cent to close at $US1.0594.

The gasoline crack spread, a rough measure of the profit from processing a barrel of oil into gasoline, rose to $US21.43, the highest since January 22.

The average price of regular gasoline at the pump nationwide was $US1.709 a gallon on Tuesday, according to Heathrow, Florida-based AAA, a national federation of motor clubs. Retail prices touched $US1.696 on February 14, the lowest since January 2009.

Nationwide crude stockpiles rose 3.5 million barrels to 507.6 million last week. Supplies at Cushing, Oklahoma, the biggest US oil-storage hub, rose to a record 65.1 million barrels. The site, which is the delivery point for WTI, has a working capacity of 73 million, according to the EIA.

Production fell by 33,000 barrels a day to 9.1 million, the lowest since October. Rigs targeting oil in the nation’s fields fell to 413 last week, the lowest since December 2009, Baker Hughes said on its website February 19.

“We aren’t seeing any sign of an end to the inventory builds in the near term,” said Adam Wise, who helps run a $US7 billion oil and natural gas bond and private equity portfolio as a managing director at John Hancock in Boston. “Until there are sustained inventory declines, there won’t be a significant price move to the upside. The only other thing that could spur a rebound is an OPEC agreement to cut output, which is looking extremely unlikely.”

Saudi Arabia, which won’t cut supply as it doesn’t trust fellow exporters to follow suit, believes high-cost producers should bear the burden of rebalancing markets, Ali Al-Naimi said Tuesday. Iranian Oil Minister Bijan Namdar Zanganeh said a Saudi-Russia proposal to freeze output was “ridiculous” since Iran seeks to boost exports after years of sanctions, according to his ministry’s news agency.


Extracted in full from the Australian Financial Review.