West Texas Intermediate surged to a five-week high after U.S. crude inventories declined for the first time in 11 weeks. The WTI-Brent spread was the narrowest in nine days.
Futures climbed 1.2 percent. Supplies fell 5.59 million barrels last week, a government report showed, more than 10 times analysts’ median forecast in a Bloomberg survey. Refineries operated at the highest rate since September. WTI also gained on TransCanada Corp. plans to start part of its Keystone XL pipeline to the Gulf Coast from Cushing, Oklahoma.
“Crude supplies finally dropped, which is what’s supposed to happen when refinery runs increase,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “The magnitude of the Keystone news is huge and will continue to have a major impact on the WTI-Brent spread.”
WTI for January delivery increased $1.16 to $97.20 a barrel on the New York Mercantile Exchange. It was the highest settlement since Oct. 29. The volume of all futures traded was 51 percent more than the 100-day average at 3:41 p.m.
Brent for January settlement declined 74 cents, or 0.7 percent, to end the session at $111.88 a barrel on the London-based ICE Futures Europe exchange. Volume was 18 percent above the average.
The European benchmark settled at a $14.68 premium to WTI, the tightest since Nov. 24. The spread closed at $19.01 on Nov. 27, the widest since March 7.
“The spread should narrow further as the southern part of the pipeline comes to fruition,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “It should move to the $8-to-$12 area.”
Crude supplies at Cushing, the delivery point for WTI, declined 18,000 barrels to 40.6 million, according to the Energy Information Administration, the Energy Department’s statistical arm. It was the first decrease in eight weeks.
“We’re seeing a dramatic narrowing of the WTI-Brent spread,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The market was waiting for a signal that the supply glut at Cushing would be reduced, and the Keystone news gave it that.”
Nationwide supplies dropped the most since July to 385.8 million barrels. Inventories were projected to decline 500,000 barrels, according to the median of 10 analyst responses in the Bloomberg survey.
U.S. crude production slipped 0.1 percent to 8.01 million barrels a day. Output surged to the most since 1989 in the prior week as the combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in central parts of the country.
Refineries operated at 92.4 percent of capacity, up 3 percentage points from the prior week and the most since September. Utilization rates usually pick up in December after maintenance is performed during the lull in fuel demand between the summer driving season and the winter heating season.
“We’re seeing an uptick in refinery operations, which is to be expected at this time of year,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
Gasoline stockpiles increased 1.83 million barrels to 212.4 million. Supplies of distillate fuel, a category that includes heating oil and diesel, rose 2.65 million barrels to 113.5 million, the first advance in six weeks.
Calgary-based TransCanada said in a government filing this week that it plans to start deliveries from Jan. 3 to Port Arthur, Texas, via the segment of the Keystone expansion project from Cushing.
“The completion of the southern part of the Keystone pipeline stretching from Cushing to the Gulf of Mexico will have a volume of 700,000 barrels a day, which is significant,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York.
The Organization of Petroleum Exporting Countries agreed today to keep the group’s target for crude output unchanged at 30 million barrels a day.
“We have rolled it over,” Saudi Arabia’s Ali al-Naimi told reporters after three hours of closed-door talks finished in Vienna. “We are all satisfied.”
OPEC will hold its next meeting June 11, Al-Naimi said.
Iran wants to produce 4 million barrels a day after international sanctions imposed because of its nuclear program are lifted, “even if it goes down to $20 per barrel,” Iran’s Oil Minister Bijan Namdar Zanganeh said. The country pumped 2.65 million barrels a day in November and last produced 4 million in August 2008, according to Bloomberg data.
“The Iranian statements are a shot over the bow,” Finlon said. “They are making it clear that they are willing to live with a price war if necessary to get back to producing 4 million barrels a day. This could be very bearish for Brent, since it’s the seaborne oil benchmark.”
Implied volatility for at-the-money WTI options expiring in January was 17 percent, down from 17.6 percent yesterday, data compiled by Bloomberg showed.
Electronic trading volume on the Nymex was 769,237 contracts as of 3:41 p.m. It totaled 792,886 contracts yesterday, 40 percent above the three-month average. Open interest was 1.65 million contracts.