Refinery utilization hits 90.8%, the highest since the first week of the year
U.S. refiners are picking up activity as the summer driving months approach, encouraging markets to increase the number of long bets on oil.
Utilization is expected to increase further during the summer months which should help to draw down growing crude oil stocks. Stronger seasonal demand in the U.S., along with a growing thirst for U.S. crude abroad, should help to strengthen the price of oil.
Hedge funds increased bets on higher West Texas Intermediate crude prices for the first time in six weeks, shrugging off rising U.S. supplies, as the coming driving season is expected to help ease the glut, according to Bloomberg.
The downstream sector reached 90.8% utilization in the week ended March 31, the most since January 6, according to the Energy Information Administration. The EIA’s report also showed gasoline inventories have fallen almost 8% since mid-February even as crude oil stockpiles continue to grow.
In addition to refiners preparing for the coming summer driving months within the U.S., increased demand for exported crude oil from the U.S. is boosting investor confidence.
Customers for U.S. crude oil: China bigger than Canada
Crude exports rose to a record in February as China displaced Canada as the U.S.’s biggest customer, Census Bureau data showed.
“As refinery utilization picks up, and if crude exports to Asia remain high, crude supplies will start to deplete,” Thomas Finlon, director of Energy Analytics Group LLC said. “The market is focused on where the market is heading, not where it’s been, and crude supplies are going to be whittled down.”
Money managers’ WTI net-long position, or the difference between bets on a price increase and wagers on a drop, climbed 9.2% in the week ended April 4 after tumbling 41% in the prior five weeks, according to the U.S. Commodity Futures Trading Commission. Net bullish bets on gasoline climbed 59%, the biggest increase since December.
OPEC keeping the bears at bay
Helping to bolster money mangers’ expectations of higher crude oil prices in the coming months, OPEC supplies continue to support stronger prices as well. Better-than-expected compliance with the group’s production cut deal, the possibility of extending the deal and supply instability in Libya continue to keep bearish sentiment from gaining too much momentum.
“The oil bears were in retreat because OPEC appears to be complying pretty well to the quota and the likelihood that the cuts will be extended,” Lynch said.
The net-long position in WTI rose by 22,415 futures and options to 267,030. Longs advanced 2.3%, while shorts retreated 12%. WTI rose 5.5% to $51.03 a barrel in the report week.
Net-long positions in Brent crude also increased. Speculators’ wagers on the grade, the international benchmark traded in London, rose by 30,563 contracts to 403,319, the biggest gain in four months, data from ICE Futures Europe showed.
Conflict in Libya supporting prices as well – one source of additional supply falls away
International crude oil benchmark Brent received support from the shutdown of Libya’s largest oilfield Sunday after a group blocked a pipeline linking the Sharara oilfield to an oil terminal, Reuters reported. The field had only just returned to production, after a week-long stoppage ending in early April.
“It means that at least one potential source of additional supply has fallen away for the time being,” said Carsten Fritsch of Commerzbank.
The conflict in Syria is adding to a developing risk premium in the region as tensions rise following a U.S. missile strike in the country last week.
“The developments in Syria should be factored in as an additional risk premium in the oil price going forward, especially now that oil inventories are drawing down and the market is no longer in massive surplus,” said Bjarne Schieldrop, an analyst at SEB.
He expects Brent to average $57.50 in the second quarter, “which means we are likely to see $60 printed at times during this period.”
