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Crude Rises to Three-Week High as Distillate Supply Drops

West Texas Intermediate crude rose to a three-week high after a report showed that U.S. distillate supplies tumbled as cold weather bolstered heating demand.

Futures gained 0.6 percent. The Energy Information Administration said stockpiles of the fuel, a category that includes heating oil and diesel, fell 3.21 million barrels last week to 120.7 million. Crude inventories increased for the first time since November. WTI also advanced after the southern portion of the Keystone XL pipeline linking Cushing, Oklahoma, to the Gulf Coast started making deliveries yesterday.

“The confluence of the cold weather boosting demand and the opening of the southern leg of the Keystone XL pipeline is sending oil higher,” said Adam Wise, who helps run a $6 billion oil and gas bond portfolio as a managing director at Manulife Asset Management in Boston. “Crude supplies increased for the first time in eight weeks, but the market is focused on heating fuels in the near term.”

WTI for March delivery advanced 59 cents to $97.32 a barrel on the New York Mercantile Exchange, the highest settlement since Dec. 31. The volume of all futures traded was 24 percent above the 100-day average at 3:28 p.m.

Brent for March settlement dropped 69 cents, or 0.6 percent, to end the session at $107.58 a barrel on the London-based ICE Futures Europe exchange. Volume was 31 percent higher than the 100-day average. The premium of Brent to WTI shrank to $10.26, the narrowest at the close of trading since Nov. 7.

Distillate Fuel

Inventories of distillate fuel tumbled more than six times as much as the 500,000-barrel median estimate in a Bloomberg survey of analysts.

Demand for distillate fuel rose 1.5 percent to 3.78 million barrels a day in the week ended Jan. 17, the most since Dec. 20, according to the EIA, the Energy Department’s statistical arm. Consumption may climb further this week as frigid weather is forecast to spread to the South from the Midwest and Northeast.

Distillate exports rose to a record 1.38 million barrels a day in July and averaged 1.29 million in October, the last month for which EIA data are available.

Ultra low sulfur diesel rose 3.86 cents, or 1.3 percent, to $3.0765 a gallon in New York, the highest close since Dec. 31. Volume was 25 percent higher than the 100-day average.

Crude inventories increased 990,000 barrels to 351.2 million barrels, less than the 1.15 million-barrel gain predicted in the survey. The American Petroleum Institute reported yesterday that stockpiles increased 4.86 million barrels last week.

‘Good Resilience’

“WTI is showing good resilience after the first crude build in eight weeks,” said Tim Evans, an energy analyst at Citi Futures in New York. “Some traders were probably expecting a bigger increase after the big gain in yesterday’s API report.”

Crude supplies at Cushing, the delivery point for New York futures, climbed 722,000 barrels to 41.6 million, the highest level since July 26.

The southern leg of TransCanada Corp.’s Keystone XL pipeline will initially move 300,000 barrels a day of crude to Nederland, Texas, from Cushing, Russ Girling, the company’s chief executive officer, said during a press conference in Calgary yesterday.

“We are going to see more landlocked crudes make it to refiners, which should further narrow the spread between WTI and Brent,” Wise said.

U.S. crude production declined 107,000 barrels a day to 8.05 million, the EIA said. It was at the highest level since 1988 in the prior week as output surged on a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies trapped in shale formations.

Price Projection

Bank of America Corp. predicted that WTI may soon advance to $100 a barrel because of a “tight” U.S. market. The start of pipelines from the central U.S. to refineries on the Gulf Coast will relieve any glut in the Midwest, Francisco Blanch, head of commodities research at Bank of America in New York, said in the report. The subsequent buildup of supplies on the coast will prevent additional price gains, he said.

“We should shoot past $100 during the next month,” said Frank Curzio, analyst at Stansberry & Associates, an investment advisory firm in Fernandina Beach, Florida. “The fundamentals of supply and demand along with the opening of the Keystone extension will support the rise in prices.”

Gasoline stockpiles climbed by 2.12 million barrels to 235.3 million. A 1.75 million-barrel gain was forecast.

Refinery Operations

Refineries operated at 86.5 percent of capacity, down 3.5 percentage points from the prior week. Refinery utilization rates have dropped in the month of January in nine of the last 10 years, EIA data shows. Units are idled at the start of the year after preparing for the winter heating season in November and December.

“Refinery operations fell sharply because of planned maintenance,” Evans said. “This will translate into tighter product supplies in the weeks ahead.”

WTI rose while U.S. equities tumbled after a gauge of China’s manufacturing dropped. Factory output may contract this month, a preliminary survey from HSBC Holdings Plc and Markit Economics signaled today. The Standard & Poor’s 500 Index and the Dow Jones Industrial Average both slipped 1.2 percent.

“This is an impressive performance,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “WTI is rising despite the disappointing Chinese PMI and falling equities.”

WTI Backwardation

The March WTI crude contract closed 56 cents higher than April, after developing a premium on Jan. 17 for the first time since October. A market in which short-term supplies cost more than later deliveries is said to be in backwardation.

Implied volatility for at-the-money WTI options expiring in March was 18.3 percent, up from 17.6 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 587,313 contracts at 3:29 p.m. It totaled 543,807 contracts yesterday, 6.1 percent higher than the three-month average. Open interest was 1.59 million contracts.

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