Oil Surges as Crude Supply Unexpectedly Drops From 86-Year High

  • U.S. crude supplies fell 4.94 million barrels last week: EIA
  • Production cap may set floor for prices: Kuwait OPEC governor

Oil Up on Potential Output Freeze

Oil climbed after U.S. crude inventories unexpectedly dropped from the highest level in more than eight decades.

Futures rose the most in three weeks in New York. Crude supplies fell 4.94 million barrels last week, Energy Information Administration data show. A 2.85 million barrel gain was projected in a Bloomberg survey of analysts. Refineries processed the most crude in three months as output and imports slipped. Diesel led gains after the report showed stockpiles of distillate fuel, which includes diesel and heating oil, tumbled on the East Coast.

"This is a welcome number," said Scott Roberts, portfolio manager and co-head of high yield who manages $2.7 billion at Invesco Advisers Inc. in Atlanta. "It’s always good to see a crude draw in April."

Prices also advanced after Kuwait said a deal to freeze output can be reached without Iran. Major producers have no option but to reach an agreement to cap production when they meet April 17 in Doha and this may set a price floor, Nawal al-Fezaia, Kuwait’s governor to the Organization of Petroleum Exporting Countries, said Tuesday. Oil has swung between gains and losses since Friday amid speculation about whether an agreement can be reached at the meeting.

West Texas Intermediate for May delivery increased $1.86, or 5.2 percent, to settle at $37.75 a barrel on the New York Mercantile Exchange. The contract rose 0.5 percent Tuesday after falling 6.9 percent the previous two sessions. Total volume traded was 30 percent higher than the 100-day average.

Crude Stockpiles

Brent for June settlement climbed $1.97, or 5.2 percent, to $39.84 a barrel on the London-based ICE Futures Europe exchange. The front-month contract’s discount to the second-month narrowed to 16 cents, the least since January, while the spread to the one-year contract slipped to the narrowest since July.

U.S. crude stockpiles dropped to 529. 9 million in the week ended April 1, the EIA data show. Inventories climbed 32.9 million barrels to 534.8 million, the highest since 1930, in the prior seven weeks.

Production fell by 14,000 barrels a day to 9.01 million, the lowest since November 2014. Rigs targeting oil in the nation’s fields fell to 362 last week, the least since November 2009, Baker Hughes Inc. said on its website April 1.

Falling Output

"Production will fall below 9 million barrels a day by summer," said Kris Kelley, an analyst at Janus Capital Management LLC in Denver. "The question is how far it will go. I think that by the end of the year production could easily fall to 8.5 million."

Crude imports dropped 6.4 percent to 7.25 million barrels a day, the lowest in two months.

Refineries bolstered operating rates by 1 percentage point to 91.4 percent of capacity. U.S. refiners typically increase utilization in April as they finish maintenance before the summer peak driving season.

"Refinery utilization is picking up and production is down," said Craig Bethune, a fund manager at Manulife Asset Management Ltd. in Toronto who focuses on energy and natural resources investments. "We’re on the right path. This should be the end of the huge builds in crude and as refinery utilization grows further, we’ll get more draws."

Stockpiles of distillate fuel on the East Coast fell 3.01 million barrels to 53.4 million, the least since July. Nationwide distillate supplies rose 1.8 million barrels. Gasoline inventories rose 1.44 million barrels.

Diesel futures for May delivery increased 6.1 percent to settle at $1.1403 a gallon. It was the biggest gain since Feb. 12. May gasoline advanced 1.2 percent to close at $1.3947.

"There’s a danger today of there being too much enthusiasm about this report," Roberts said. "The builds in gasoline and diesel have me concerned because that could speak to weak fuel demand. We need gasoline to be strong."

Output freeze and oil-market news:

  • Russia’s position on freezing oil production is unchanged, Reuters reported Wednesday. The country is proposing production be capped, not exports, according to the report.
  • Iran sees oil exports at 2.25 million barrels a day in a year and output at 4 million by March 2017, oil ministry news service Shana reports, citing Oil Minister Bijan Namdar Zanganeh.
  • Vitol Group BV earned $1.6 billion last year, the most since 2011, as the world’s largest independent oil trader profited from price swings in the energy market, according to a person familiar with the matter.
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