Oil Climbs to 3-Week High on Distillate Supply Forecast

West Texas Intermediate crude rose to a three-week high on speculation that U.S. distillate fuel supplies slid as falling temperatures bolstered heating demand.

Futures advanced 1.9 percent. The U.S. will probably report tomorrow that stockpiles of distillate fuel, including heating oil and diesel, dropped 500,000 barrels last week, a Bloomberg survey showed. Record snowfall for the date fell in New York’s Central Park as cold weather moved in. WTI also increased as TransCanada Corp. (TRP) said a leg of the Keystone XL pipeline started delivering crude to the Gulf Coast.

“The impact of cold weather on demand is the focus right now,” said John Kilduff, partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The opening of the southern portion of the Keystone pipeline is giving WTI some additional support.”

WTI for March delivery increased $1.76 to $96.73 a barrel on the New York Mercantile Exchange. It was the highest settlement since Dec. 31. Volume of all contracts was 4.2 percent above the 100-day average at 4:39 p.m.

Prices were little changed from the settlement after the American Petroleum Institute reported distillate supplies fell 2.29 million barrels last week. WTI rose $1.61, or 1.7 percent, to $96.58 a barrel at 4:39 p.m. in electronic trading. It was $96.76 before the report was released at 4:30 p.m.

Brent for March settlement rose $1.54, or 1.4 percent, to end the session at $108.27 a barrel on the London-based ICE Futures Europe exchange. Volume was 3.6 percent less than the 100-day average. The European benchmark crude closed at an $11.54 premium to WTI, down from $11.76 yesterday.

Distillate Supplies

Distillate stockpiles dropped to 123.5 million barrels in the week ended Jan. 17, according to the median of 10 analyst estimates in the Bloomberg survey before tomorrow’s report from the Energy Information Administration.

“There should be a very big distillate-supply decline in next week’s report,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

The low in Central Park, where 11 inches (28 centimeters) of snow fell, is expected to reach 7 degrees Fahrenheit (minus 14 Celsius) tonight, the National Weather Service said.

Spot heating oil in New York slipped 0.88 cent to 4.13 cents a gallon over the ultra low sulfur diesel traded on the Nymex at 1:58 p.m., according to data compiled by Bloomberg. Yesterday, reached a 5-cent premium, the highest level since April 14, 2008. Boston heating oil dropped 0.87 cent to 8.13 cents above futures, down from a 9-cent premium yesterday, which was also the highest since April 2008.

Diesel Futures

Ultra low sulfur diesel rose 2.32 cents, or 0.8 percent, to $3.0379 a gallon in New York, the highest settlement since Dec. 31. Volume was 24 percent higher than the 100-day average.

“The market is getting support from the weather,” Kilduff said. “We’re going to see fuel supplies fall in coming weeks, which is going to be supportive for both Brent and WTI.”

Refineries on the U.S. East Coast depend on imported crude barrels from West Africa and Europe, which are priced off of Brent. The European grade is the benchmark for more than half the world’s oil.

Gasoline inventories probably rose by 1.75 million barrels last week, according to the survey. Crude stockpiles are projected to have climbed 1.15 million barrels in the first increase since November.

Scheduled Release

The EIA, the Energy Department’s statistical arm, will release its report a day later than usual because of the Martin Luther King Jr. Day holiday on Jan. 20.

Initial shipments on the Keystone pipeline are about 300,000 barrels a day, Russ Girling, TransCanada’s chief executive officer, said during a press conference in Calgary today. The link runs to Nederland, Texas, from Cushing, Oklahoma, the delivery point for WTI traded on the Nymex.

TransCanada projects pipeline capacity will average 520,000 barrels a day this year as it ramps up to 700,000 and a potential of 830,000.

The proposed northern portion of Keystone XL, which would stretch from Alberta’s oil sands to Nebraska, is being held up because it requires a presidential permit. TransCanada split its original project after President Barack Obama rejected a prior route in 2012 because of fears its path through Nebraska would threaten ecologically sensitive lands.

Additional pipeline capacity is needed to move surging U.S. and Canadian oil output to refineries in coastal region. U.S. crude production increased 14,000 barrels a day to 8.16 million in the week ended Jan. 10, the most since 1988, the EIA said Jan. 15.

Global Demand

The International Energy Agency raised its global oil demand forecast yesterday. Consumption will climb by 1.3 million barrels a day, or 1.4 percent, to a record 92.5 million this year, the monthly report showed. The gain of 90,000 barrels a day from December’s forecast follows the first year demand rose in developed nations since 2010, according to the Paris-based IEA. The U.S. was the largest driver of growth.

Implied volatility for at-the-money WTI options expiring in March was 18 percent, up from 17.8 yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 502,920 contracts at 4:41 p.m. It totaled 464,299 contracts yesterday, 9.8 percent lower than the three-month average. Open interest was 1.61 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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