Alex Mills
As supplies of crude oil at Cushing, Oklahoma, dropped last week, prices on the New York Mercantile future exchange (July) settled at $104.40 per barrel.
Gasoline for July delivery rose $0.0263 to settle at $3.0008 per gallon, and July heating oil gained $0.0202 to $2.9043 per gallon.
The Brent-WTI spread rose from the lowest level since April after the EIA said supplies at Cushing dropped 198,000 barrels to 21.2 million last week.
Falling inventories at the hub have increased prices and narrowed the gap.
Brent gained on concern that Middle East tension will spread and disrupt supplies. Brent crude traded at a premium of $5.55 to WT, up from $5.17, the smallest since April 14th.
Cushing supplies reached the lowest level in more than 5 years last week, according to the EIA.
Analysts at Morgan Stanley have estimated a minimum operating level of 20 million barrels at the hub.
Cushing inventories are down 49% since the southern leg of the Keystone XL pipeline began moving oil to Gulf refineries from the hub in January. The decline last week was the smallest since a gain in early April.
The WTI-Brent spread has averaged about $6.60 in the 2nd quarter, down from $9.41 in the January-March period.
The EIA said in a monthly report that seasonal demand for refined products and strong refinery runs will help keep the WTI discount to Brent near $7 for a few months and the gap will widen to $12 in December. The EIA expects the discount to average $9 in 2014 and $11 in 2015.
Total US crude supplies decreased 2.6 million barrels to 386.9 million last week, a two-month low, the EIA reported. Refineries operated at 87.9% of their capacity last week, down from 90.8%. Marathon Petroleum shut a crude unit at the Garyville, Louisiana, refinery after tornado-related damage on May 30th. The unit was brought back online yesterday after the company installed a temporary cooling water system.
Brent climbed as fighters from a breakaway al-Qaeda group are in position to seize Iraqi energy infrastructure in the northern part of the country after taking control of Mosul, Iraq’s second-largest city. The fighting in the northern Iraqi city forced a halt in repairs to a main pipeline from Kirkuk to the Mediterranean port of Ceyhan, Turkey. The fighting hasn’t extended to the southern part of the country, from where about 75% of Iraq’s crude production comes. The hostilities are having no effect on Iraq’s crude shipments, Oil Minister Abdul Kareem al-Luaibi said.
Iraq produced 3.3 million bpd in May, the second highest among OPEC. A big question for the oil sector in Iraq is whether extremist groups will seek to expand their attacks from the Kirkuk-Ceyhan pipeline to other energy infrastructure, Barclays said in a report.
In London, the Brent contract for July delivery on ICE settled $0.43 higher at $109.95 per barrel yesterday.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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