Crude Oil Advances for Second Day on U.S. Supply Drop, Europe Debt Talks

Crude oil climbed for a second day after a report showed that U.S. supplies dropped as refineries bolstered fuel output and on speculation that European leaders will agree on steps to address the region’s debt crisis.

Oil rose 0.7 percent after the Energy Department said stockpiles fell 3.73 million barrels to 351.7 million last week. Analysts surveyed by Bloomberg News forecast a decrease of 2 million. Refineries operated at 90.3 percent of capacity, an 11- month high. European officials meet tomorrow to break a deadlock over a new Greek rescue plan.

“The crude number was very strong,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Refineries are operating at the highest rate this season, which suggests there is pretty strong demand somewhere. It looks like U.S. refineries are producing a great deal of fuel for export.”

Crude oil for August delivery increased 64 cents to settle at $98.14 a barrel on the New York Mercantile Exchange. The contract expired today. The more actively traded September future advanced 54 cents, or 0.6 percent, to settle at $98.40.

Brent oil for September settlement rose $1.09, or 0.9 percent, to end the session at $118.15 a barrel on the London- based ICE Futures Europe exchange. The spread between oil in New York and Brent widened to a record $22.63 a barrel July 14. The September contracts for the grades ended today $19.75 apart.

Crude oil supplies at Cushing, Oklahoma, the physical delivery point for West Texas Intermediate oil, the grade traded in New York, tumbled 977,000 barrels to 36.7 million.

Floating-Roof Tanks

DigitalGlobe Inc. said on July 18 that Cushing inventories fell 2.5 percent from July 9 to July 14. Stockpiles held in floating-roof tanks at the hub dropped 898,000 barrels to 35.7 million barrels, satellite images taken by the Longmont, Colorado-based company show.

Refinery operations advanced 2.3 percentage points last week, the report showed. Operating rates were forecast to be unchanged, according to the median of 14 analyst estimates in a Bloomberg News survey.

“We had a bump in refinery operating rates, so crude oil was converted into products,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Overall petroleum stocks ended the week higher.”

Gasoline supplies grew 757,000 barrels to 212.5 million, the first gain in five weeks. Inventories of distillate fuel, a category that includes heating oil and diesel, rose 3.43 million barrels to 148.5 million barrels. Total commercial stockpiles of crude oil and fuel climbed 3.8 million barrels to 1.07 billion.

Refinery Margins

Profit margins for refiners, as expressed by the so-called crack spread, climbed to a record $34.993 a barrel July 14, based on New York futures prices. The hypothetical profit to refine three barrels of oil into two barrels of gasoline and one of heating oil was $32.10 a barrel, based on today’s settlement prices of September contracts.

“Barrels are going to other countries because of the Brent premium,” said Kyle Cooper, director of research for IAF Advisors in Houston. “If you are a refiner who can get your hands on WTI, you are going to process it because the margins are out of sight. The crack spread is wide enough that you will do well even with more expensive grades.”

The Energy Department will deliver about 7.7 million barrels of crude oil from the U.S. Strategic Petroleum Reserve in July, according to a notice on its website. The rest of the 30.64 million-barrel release will be delivered in August.

“The crude numbers weren’t as bullish as the first looked,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “People were probably making room for SPR barrels, which will soon start showing up in the data.”

Berlin Meeting

German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting in Berlin today to seek common ground on fighting the region’s debt crisis before tomorrow’s European summit, a meeting that their Greek counterpart says could make or break the euro.

“There’s optimism that an agreement will come out of tomorrow’s EU summit, will be enough to calm fears about the debt crisis,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion include enabling the main 440 billion-euro ($626 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because negotiations are in progress.

U.S. Deficit Proposal

President Barack Obama endorsed a U.S. deficit-cutting proposal by a bipartisan group of senators. The plan for a $3.7 trillion debt reduction faces resistance from House Republicans as lawmakers intensify efforts for a compromise on government spending less than two weeks before a threatened default.

Oil volume in electronic trading on the Nymex was 454,225 contracts as of 3:11 p.m. in New York. Volume totaled 617,053 contracts yesterday, 8.3 percent below the average of the past three months. Open interest was 1.49 million contracts.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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