Oil Climbs the Most in Two Months on U.S. Crude Output Decline

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Crude Oil Inventories Rise 4.77M Barrels

Oil advanced the most in two months in New York after a government report showed that U.S. crude output dropped from the highest level in more than three decades.

Production dropped 36,000 barrels a day to 9.39 million last week, the first decline since January, according to the Energy Information Administration. That’s down from 9.42 million on March 20, the most in weekly estimates that started in January 1983.

Drillers cut the number of active rigs seeking oil in the U.S. last week to the fewest since March 2011. Iran and world powers pressed ahead with talks for an outline agreement to end the 12-year standoff over the nation’s nuclear program, with diplomats saying major obstacles must be overcome before any announcement. Oil capped the longest run of quarterly declines since 2003 on Tuesday, amid speculation Iranian supplies will add to a global glut.

“There’s been a significant drop in the rig count and it’s starting to be reflected in the data,” Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC in Leawood, Kansas, who helps manage $16.9 billion, said by phone. “There’s no doubt that the pace of U.S. oil production is going to slow.”

Market Movement

West Texas Intermediate for May delivery rose $2.49, or 5.2 percent, to close at $50.09 a barrel on the New York Mercantile Exchange. It was the biggest gain since February 3. Volume was 14 percent above the 100-day average at 2:55 p.m.

Brent for May settlement climbed $1.99, or 3.6 percent, to end the session at $57.10 a barrel on the London-based ICE Futures Europe exchange. The North Sea oil closed at a $7.01 premium to WTI.

U.S. crude production has surged as the combination of horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies from shale formations in the central U.S.

“The drop in production will continue because of the decrease in drilling activity,” Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at John Hancock in Boston, said by phone. “These shale wells have steep decline rates and the drilling rate isn’t high enough to maintain output going ahead.”

Nationwide Stockpiles

Crude supplies gained 4.77 million barrels to 471.4 million in the week ended March 27, the most in records compiled since August 1982. A gain of 4.2 million barrels was the median of eight analyst estimates in a Bloomberg survey.

“The market really wants to believe this is the start of a sustained drop in production,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $126 billion of assets, said by phone. “I don’t see it, though, and think we’ll continue to see supplies build.”

Inventories at Cushing, Oklahoma, the delivery point for WTI traded in New York, climbed 2.63 million barrels to a record 58.9 million.

Refineries operated at 89.4 percent of their capacity, up 0.4 percentage point from the prior week, the report showed. U.S. refiners schedule maintenance for late winter as they transition from winter fuels to maximizing gasoline output.

“There’s very strong refinery demand for crude oil,” Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania, said by phone. “Refineries are coming out of turnarounds early and we’ll see demand pick up further in the weeks ahead.”

Fuel Prices

Supplies of gasoline fell 4.26 million to 229.1 million, the lowest level since December. Demand for the fuel rose 2.3 percent to an average 8.96 million barrels a day in the last four weeks, the highest level since Jan. 16.

Gasoline futures for May delivery rose 6.12 cents, or 3.5 percent, to settle at $1.8312 a gallon. May ultra low sulfur diesel climbed 3.89 cents, or 2.3 percent, to close at $1.7469.

Inventories of distillate fuel, a category including diesel and heating oil, rose 1.33 million barrels to 127.2 million.

“There are good signs on both the supply and demand front,” Thummel said. “We’ve been looking at more supply than demand but that equation is going to reverse. We’ll start to see crude inventories fall in the second half of the year.”

Dollar Weakness

Futures also advanced as a falling dollar bolstered the appeal of commodities to investors. The U.S. currency slipped after a report showed employers added fewer jobs in March than forecast. Employers added 189,000 jobs in March, ADP Research Institute in Roseland, New Jersey said Wednesday. Economists had forecast 225,000.

Envoys negotiating to end the impasse over Iran’s nuclear program are “working hard to finalize a deal, a good deal,” European Union foreign policy chief Federica Mogherini said on Twitter. U.K. Foreign Secretary Philip Hammond earlier said the sides had a “broad framework of understanding,” with some key issues still left to resolve.

Iran can boost shipments by 1 million barrels a day if sanctions are lifted, Oil Minister Bijan Namdar Zanganeh said March 16. It may be stockpiling from 7 million to as much as 35 million barrels, shipbrokers and government officials estimated. Barclays Plc and Societe Generale SA predict these barrels would be the first to be exported should a nuclear pact be reached.

The Organization of Petroleum Exporting Countries produced 31 million barrels a day in March, the most since August 2013, according to data compiled by Bloomberg. Iran pumped 2.85 million a day, the fastest pace in a year.

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