WTI climbs above $45 amid U.S. crude output drop, Fed statement

NEW YORK (Bloomberg) -- Oil closed above $45/bbl in New York for the first time since November after U.S. crude output dropped and Federal Reserve policy makers signaled they’re open to raising interest rates in June.

 

Crude production fell to 8.94 MMbpd last week, the least since October 2014, Energy Information Administration data show. Futures fell on the initial release of the report because it showed crude inventories rose. Oil extended gains after the Federal Open Market Committee omitted previous language that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” such developments.

 

"We are focused on U.S. production, which was down again," said Cavan Yie, senior equity analyst at Manulife Asset Management Ltd. in Toronto. "Production is down about 650,000 barrels from the peak, and it’s going to keep dropping because nobody is spending any money to drill new wells."

 

Oil has rebounded since slumping to the lowest level since 2003 in February, amid signs the global surplus will ease as U.S. production declines. The World Bank boosted its forecast for oil prices this year, projecting that U.S. output cuts will steepen in the second half of 2016. Markets may rebalance by the end of the year, BP CEO Bob Dudley said Tuesday as the company reported a surprise first-quarter profit.

 

West Texas Intermediate oil for June delivery increased $1.29, or 2.9%, to settle at $45.33/bbl on the New York Mercantile Exchange. It’s the highest close since Nov. 4.

 

Global Risk

 

Brent for June settlement rose $1.44, or 3.1%, to $47.18/bbl on the London-based ICE Futures Europe exchange. It’s the highest close since Nov. 10. The global benchmark ended the session at a $1.85 premium to WTI.

 

"The market seems to be focused on the change in Fed language about global risk," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "They are no longer warning of possible risks, which is being taken as a positive sign."

 

The Fed left its benchmark interest rate unchanged. Policy makers are weighing when to raise rates again after the first increase in almost a decade in December. Central-bank optimism about economic growth and inflation may renew policy divergence between a tightening Fed and central banks overseas.

 

Bull Market

 

"We’re in a bull market," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.6 billion. "Every pullback is being seen as a buying opportunity, which is what happens."

 

Nationwide crude supplies rose 2 MMbbl to 540.6 MMbbl last week, the most since 1929, EIA data show. Supplies at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, climbed by 1.75 MMbbl.

 

"Demand should exceed supply by the second half of the year at a minimum," said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $13 billion. "There’s little margin for error, so any disruption could have a major impact."

 

Refineries reduced operating rates by 1.3 percentage points to 88.1% of capacity. U.S. refiners typically increase utilization in April as they finish maintenance before the summer peak driving season.

 

Gasoline inventories rose 1.61 MMbbl last week, while supplies of distillate fuel, a category that includes diesel and heating oil, fell 1.7 MMbbl.

 

Surging Demand

 

U.S. gasoline consumption, averaged over four weeks, was up 5.6% from a year earlier at 9.4 MMbpd through April 22, EIA data show. Americans drove 232.2 billion vehicle miles in February, up 5.6% from a year earlier, Transportation Department data show.

 

Gasoline futures for May delivery increased 1% to $1.5808 a gallon, the highest settlement since August. May diesel climbed 3.5% to $1.3795, the highest close since November.

 

The average price of regular gasoline at the pump nationwide was $2.152 a gallon on Tuesday, down 15% from a year earlier, according to data from Heathrow, Florida-based AAA, a national federation of motor clubs.

 

"All signals point to strong demand," Thummel said. "Gasoline prices are lower than a year ago as we approach the driving season. Last year low prices boosted demand and there’s no reason to expect this year to be any different."