Nymex crude oil futures settled at their highest levels in nearly three months on strong fund buying spurred by tightening U.S. oil inventories.
With U.S. crude stockpiles expected to remain below five-year average levels, investors scrambled into the market to buy up near-term contracts. The flurry pushed U.S. benchmark futures up 8.2% in the past three days and reversed a three-year market structure in which nearby contracts traded at a discount to future contracts.
"There is a sea change in sentiment," ignited by the declining inventories, said John Kilduff, founding partner at hedge fund Again Capital.
"Volume has been massive; there has been a lot on money on sidelines getting back in on the long side," or positioning to profit from rising prices, he said.
Light, sweet crude oil for December delivery on the New York Mercantile Exchange settled $1.90, or 2.1%, a barrel higher, at $93.17. That is the highest price since Aug. 2. The December contract settled at a 24-cent premium to the January contract, the largest spread between the two nearby contracts in three years.
ICE December North Sea Brent crude settled 53 cents lower, at $110.92 a barrel. The spread between Brent and Nymex crude, which hit a record $27.90 a barrel at midmonth, was $17.75 at the settlement, the lowest level since early July. Plentiful inventories had kept oil for nearby delivery at a discount to forward months, but a steep drop in high-priced imports eroded what had been a hefty cushion of excess crude. The Energy Information Administration reported last week that U.S. crude oil inventories dropped below five-year averages, with crude stockpiles at Cushing, Okla., the delivery point for the Nymex contract, 8.6% below year-ago levels and down more than 25% from May levels.
Analysts surveyed by Dow Jones Newswires expect that EIA data due out at 10:30 a.m. EDT Wednesday will show crude stocks rose by 400,000 barrels, a slim gain that would keep stockpiles below five-year averages. Stocks of gasoline are expected to drop by 1.6 million barrels, while inventories of distillate (diesel/heating oil) are expected to show a 1.8 million-barrel drop. Refiners are expected to keep operations at reduced levels during seasonal maintenance work.
Carl Larry, director of research and derivatives at Blue Ocean Brokerage, said several factors make U.S. crude futures attractive for investors, but not on a fundamental basis. "It's not a buy, but a play," he said, explaining that hedge funds and other investors were "caught short and now are scrambling" to cover bets of a further drop in prices after U.S. inventories showed strong, unexpected declines in recent weeks.
Traders "are looking at the [inventory] 'stats' and starting to panic and back out of trades they had set up," based on expectations of steady to lower prices, Larry said. "This isn't an entry point to get long, it's a move to get out and cover," he said, adding he believes the rally may stall out around $96 a barrel, last seen in late July.
Meantime, Brent prices are under pressure from increased Libyan and Nigerian supplies. Nuri Berruien, chairman of Libya's National Oil Co., said Libyan oil output now is near 500,000 barrels a day, or about one-third of its level before the civil war began in February. Traders said Nigerian crude exports in December are scheduled to increase from November levels, adding to pressure on Brent prices.
Analysts said the spread between Brent and U.S. crude would need to drop to $12 to $15 to prompt a jump in U.S. imports.
Some market participants said oil prices are vulnerable to broad swings depending on the outcome of Wednesday's European summit called to find a solution to the sovereign-debt crisis.
"If the Europeans are successful" in creating a credible plan to resolve the crisis, said Dominick Chirichella, analyst at the Energy Management Institute, U.S. crude prices work their way toward $100 a barrel, last seen on an intraday basis in July. A disappointing outcome could put crude back on course to the $75-a-barrel low hit in October, he said.
November-delivery heating oil settled 0.44 cent lower at $3.0502 a gallon. November reformulated gasoline blendstock settled 1.1 cents higher at $2.6998 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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