Tuesday, July 22, 2014

WTI Oil Rises as U.S. Supply Drops Amid Refinery Demand

West Texas Intermediate rose the most in a month after a Malaysian Airways jet was shot down in Ukraine. Prices also climbed as U.S. crude supplies fell as refiners boosted processing to the highest level since 2005.

The Boeing 777 carrying 295 people was hit by a missile and went down over eastern Ukraine near its border with Russia, the Ukrainian Interior Ministry said. Crude supplies dropped by 7.53 million barrels last week, the most since January, while refineries operated at 93.8 percent of capacity, the Energy Information Administration said yesterday. Prices reached new highs after floor trading ended when Israel sent ground forces into the Gaza Strip.

“We’re seeing a knee-jerk reaction to the plane crash,” said Mike Wittner, the head of oil market research at Societe Generale SA in New York. “An event like this always makes people nervous about the security of supply.”

WTI for August delivery increased $1.99, or 2 percent, to settle at $103.19 a barrel on the New York Mercantile Exchange. It was the biggest gain since June 12 and the highest close since July 8. Volume was more than double the 100-day average.

Brent for September settlement rose 72 cents, or 0.7 percent, to end the session at $107.89 a barrel on the London-based ICE Futures Europe exchange. The August contract dropped to $105.85 when it expired yesterday. The European benchmark crude closed at a $5.69 premium to the September WTI contract.

Israeli Offensive

Israel commenced a ground offensive intended to stop the barrage of missiles fired by Hamas and other Palestinian militants, raising the stakes of the 10-day-old conflict after an Egyptian peace plan was spurned. The Middle East accounted for 32 percent of global crude output last year, BP Plc’s Statistical Review of World Energy shows.

WTI climbed as much as $2.70, or 2.7 percent, to $103.90 a barrel in electronic trading. Brent gained as much as $1.35, or 1.4 percent, to $108.52.

The flight from Amsterdam and Kuala Lumpur was hit by a missile and went down near the eastern town of Torez, Ukraine’s Interior Ministry said on its Facebook page. The plane crashed in the main battleground of Ukraine’s civil war and is one of a number to have been downed in the region in the past month. Rebels in the self-proclaimed Donetsk People’s Republic said they weren’t involved, Russia’s Interfax news service reported.

Geopolitical Tension

“Any event like this is bullish for the oil market, the question is by how much,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion, said by phone. “When geopolitical tension increases and it involves a country that’s even peripherally involved with the export of oil, there’s going to be an impact. The Ukraine conflict could easily spin out of control.”

Prices also rose after the U.S., acting with the European Union, imposed sanctions on Russian banks and energy and defense companies in its bid to punish the nation for supporting rebels in Ukraine. Among those hit by the new penalties were OAO Rosneft, Russia’s largest oil company, and natural gas producer OAO Novatek, the Treasury Department said yesterday.
“The market’s up because it’s been hit by two serious geopolitical events,” Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, said by phone. “There’s been the plane crash today which comes less than a day after new sanctions were imposed on Russia.”

‘Near Glut’

WTI surged to $107.73 on June 20, the highest level since September, after militants from a breakaway al-Qaeda group known as Islamic State captured the city of Mosul. Prices also climbed when Russia annexed Ukraine’s Crimea peninsula.

U.S. crude stockpiles dropped to 375 million barrels, the least since the week ended March 7, according to the EIA, the Energy Department’s statistical arm. Inventories rose to 399.4 million barrels in the week ended April 25, the most since the EIA began publishing weekly data in 1982.

“We’re eating away at the near glut of supply we had in the spring,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Refiners are processing more crude for both export and to meet the small increase in demand here, that’s due to an improving economy.”

Crude production rose 78,000 barrels a day to 8.592 million last week, the most since October 1986. Most U.S. crude exports are barred because of 1975 legislation, while fuel can be shipped outside the country.

‘Perfect Sense’

“The ramp-up in refinery operations makes perfect sense because that’s how domestic oil output is exported,” O’Grady said. “I’m surprised they didn’t get here earlier.”

Refinery runs climbed to 16.6 million barrels a day, the most in weekly data going back to 1989.

Gasoline dropped to a three-month low, helping send the profit refiners make from processing oil into the fuel to the least since February. The crack spread, the profit from processing a barrel of WTI oil into one of gasoline, tumbled 11 percent to $17.725 a barrel at 2:57 p.m. based on August contracts. It’s the lowest level since Feb. 19.

Stockpiles of gasoline rose by 171,000 barrels while supplies of distillate fuel, a category that includes heating oil and diesel, gained 2.53 million.

“The crack spread is getting slaughtered,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone. “The gasoline yield has been low and is sure to increase. With refineries running at such high rates, production will increase and a lot of gasoline is going to go into storage.”

Gasoline for August delivery, which settled at $2.8817 on the Nymex, reached an intraday high of $2.8943 after floor trading closed.

U.S. gasoline pump prices dropped 0.8 cent to $3.59 a gallon nationwide yesterday, the lowest since April 7, according to AAA, the largest U.S. motoring group.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Richard Stubbe, Stephen Cunningham

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