West Texas Intermediate crude climbed on speculation that U.S. inventories will keep declining after the largest two-week drop in at least three decades.
Futures advanced 1 percent today and 2.6 percent this week. Inventories slid 20.2 million barrels to 373.9 million in the two weeks ended July 5, the Energy Information Administration reported July 10. WTI has moved into backwardation, with futures closest to expiration more expensive than those for later delivery, removing the financial incentive to hold supplies. WTI also gained as corporate earnings topped analysts’ estimates.
“We’ve had a staggering two-week draw in crude inventories,” said Tom Finlon, the Jupiter, Florida-based director of Energy Analytics Group LLC. “Given the structure of the market, it looks like we’ll see another big draw.”
WTI crude for August delivery advanced $1.04 to settle at $105.95 a barrel on the New York Mercantile Exchange. The contract closed at $106.52 on July 10, a 15-month high. The volume of all futures traded was 10 percent above the 100-day average for the time of day. The August contract was 40 cents more than the September one.
Brent oil for August settlement gained $1.08, or 1 percent, to end the session at $108.81 a barrel on the London-based ICE Futures Europe exchange. The volume of all futures traded was 3.9 percent greater than the 100-day average.
The European benchmark grade traded at a $2.86 premium to WTI at the settlement today. The spread dropped to $1.99 on July 10, the narrowest differential, based on closing prices, since November 2010.
The two-week decrease in crude stockpiles was the biggest since at least 1982, according to EIA, the Energy Department’s statistical arm. Inventories at Cushing, Oklahoma, the delivery point for WTI, dropped 2.69 million barrels last week to 47 million, the report showed.
Refineries operated at 92.4 percent of capacity on July 5, up 0.2 percentage point from the prior week and the highest level this year, according to EIA. Utilization rates usually peak during the summer months when U.S. gasoline demand rises.
“The fundamentals are very bullish,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund that focuses on energy. “The inventory drop was very big and we saw some strong demand. Next week’s report should show an additional decline in supplies.”
Stockpiles of gasoline fell 2.63 million barrels to 221 million last week, according to EIA. Demand increased 1.8 percent to 9.08 million barrels a day averaged over the last four weeks, the highest level since August, the report showed.
Gasoline surged as unplanned unit outages at refineries sparked concern that supplies may tighten during the peak-demand summer months. Gasoline for August delivery increased 9.61 cents, or 3.2 percent, to $3.1175 a gallon on the Nymex, the highest settlement since March 18.
“The story of the energy complex this year has been one of rebalancing,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We’ve already seen WTI rebalance versus the Brent market and are now seeing gasoline do the same thing verses crude oil.”
Half of 42 analysts and traders polled by Bloomberg News estimated WTI will climb through July 19 because of the decline in inventories. Eighteen respondents in the Bloomberg survey, or 43 percent, predicted a drop and three projected no change.
Oil also gained after JPMorgan Chase & Co. (JPM:US) and Wells Fargo & Co. (WFC:US) reported better-than-anticipated second-quarter profit today. JPMorgan, the largest U.S. bank by assets, reported a 31 percent increase as revenue from trading stocks and bonds climbed. Wells Fargo, the largest U.S. home lender, said profit rose 19 percent as the bank clamped down on expenses.
Alcoa Inc. (AA:US) kicked of the reporting season July 8, posting adjusted profit that exceeded analyst estimates. The start of earnings season is typically demarcated by Alcoa’s release.
“The beginning of earnings season has been positive,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “Two big banks came out with better-than-expected earnings today, which is supportive. It’s safe to assume that we will see another massive decline in supply because the market is well into backwardation.”
Futures also increased after Federal Reserve Chairman Ben S. Bernanke called on July 10 for the central bank to maintain bond purchases.
“Investors have been relieved by the fact that quantitative easing will not be unwound as fast as Bernanke had indicated before,” said Hans van Cleef, an energy economist at ABN Amro Bank in Amsterdam. “As long as the Fed doesn’t signal that will change, that will keep prices elevated for the time being.”
Implied volatility for at-the-money WTI options expiring in September was 21.5 percent, down from 22.2 percent yesterday, data compiled by Bloomberg showed.
Electronic trading volume on the Nymex was 573,114 contracts as of 2:46 p.m. It totaled 934,688 contracts yesterday, 40 percent above the three-month average. Open interest was 1.84 million contracts.
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