WTI futures gain for a fifth day as US distillate supplies drop, rising fuel demand

West Texas Intermediate crude rose for a fifth day, extending the longest rally in seven weeks, after a government report showed US distillate fuel stockpiles fell six times more than analysts had expected as cold weather in the US boosted demand for heating oil. A report by the industry-funded American Petroleum Institute showing a rise in US petroleum products demand in December further boosted prices.

On the New York Mercantile Exchange, WTI crude for delivery in March traded at $97.53 per barrel at 8:13 GMT, up 0.22% on the day. Prices shifted in a daily range between $97.62 and $97.20 a barrel. The contract rose by 0.61% on Wednesday to settle at $97.32, the highest close this year and fourth consecutive daily gain. US crude is up 3.6% so far this week, set for the best weekly performance since December.

Meanwhile on the ICE, Brent futures for settlement in March were mostly unchanged at $107.57 a barrel and held in a daily range between $107.41 and $107.80. The European benchmark fell by 0.6% on Wednesday, dragged by downbeat manufacturing data from China, and is up 1.1% on weekly basis. Brents premium to its US counterpart narrowed to $10.04 per barrel, down from $10.26 yesterday, based on closing prices.

US crude drew support after the Energy Information Administration reported a much-larger-than-expected decline in US distillate stockpiles last week. Inventories fell by 3.21 million barrels in the seven days through January 17th as bitter cold weather in the US stoked demand for heating oil, sharply exceeding the median estimate of ten analysts surveyed by Bloomberg for a drop of 500 000 barrels.

Tetsu Emori, a commodities fund manager at Astmax Investment, said, cited by CNBC: “The US benchmark is drawing support from the fall in heating oil stocks as a result of the severe winter. It may be helping Brent as European refiners export heating oil to the United States, to the East Coast.”

Refineries operated at 86.5% of their operable capacity, the EIA also said, down from 90.0% in the previous period, suggesting the severe weather had an impact on refiner runs. Gasoline production increased last week, while distillate fuel output decreased, averaging 8.5 million and 4.5 million barrels per day.

Motor gasoline stockpiles jumped by 2.12 million barrels last week to 235.3 million, underperfoming analysts expectations for a 1.75-million drop.

US crude inventories rose by 990 000 barrels to 351.2 million, snapping seven straight days of gains. Analysts expected a 1.15-million increase. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, increased to 41.6 million barrels, up from 40.9 million in the previous week.

Also fanning positive sentiment, a separate report by the industry-funded American Petroleum Institute showed that demand for petroleum products in the US jumped in December, reflecting accelerating economic growth. Year-on-year, consumption surged by 5.8% in December to 19.2 million barrels per day. Gasoline demand gained 4.5% to 8.8 million barrels, the API said, while output jumped to a record for the month at 9.4 million bpd. This was also 66 000 bpd below the all-time record.

A separate weekly Bloomberg survey however showed US crude may fall next week amid expectations for a further gain in crude inventories. Seventeen out of 36 participants in the poll, or 47%, wagered that prices will decline through January 31st, while eleven expected a jump and the remaining eight were neutral.

China manufacturing

The oil market, and particularly the Brent benchmark, was pressured yesterday, narrowing its premium to US crude, after a preliminary private report showed that declining new orders led to the first contraction in China’s manufacturing activity in six months, confirming that a mild slowdown late last year has extended into 2014. The HSBC Flash China Manufacturing PMI plunged to 49.6, defying analysts’ projections for a minor increase to 50.6 from December’s final reading of 50.5. Meanwhile, the Flash China Manufacturing Output Index registered at 51.3 in January, down from 51.4 in December, hitting a three-month low.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented on the report: “The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013.”