Oil Holds as Freeze Halts Third of US Output
(Bloomberg) -- Oil held gains after surpassing $60 a barrel for the first time in a year as a cold snap and power crisis took out a third of U.S. crude production.
Some 3.5 million barrels a day of American output has been halted, according to traders and industry executives, as a cold blast freezes well operations and cuts power across the central U.S. That’s being offset, however, by the suspension of more than 3 million barrels a day of refining capacity, according to Energy Aspects Ltd.
“The production loss is significant and could last for several days if not weeks,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd.
The crisis has spurred a rush for fuels, with U.S. gasoline futures up more than 5% this week. But the loss of demand from the refineries has also pushed West Texas Intermediate futures’ prompt time-spread into a bearish contango structure for the first time in about a month.
Prices have also drawn support amid supply discipline from OPEC+ and a gradual improvement in demand as vaccines are rolled out. Some analysts see commodities entering a so-called super-cycle as investors use them to hedge against accelerating inflation as the global economy rebounds.
Temperatures in Texas are now low enough to freeze oil and gas liquids at the well head and in pipelines laid on the ground. They’re put under the surface in colder regions. Before the crisis, the U.S. was pumping about 11 million barrels a day, according to government data. Production in the Permian Basin alone -- America’s biggest oil field -- has plummeted by as much as 65%.
In Russia, meanwhile, freezing temperatures are also contributing to production curtailments. The expected increase in the nation’s February oil output has so far not materialized, as some fields curb pipeline flows due to the abnormally cold weather.
While WTI’s prompt time-spread has flipped back into contango, the similar spread for Brent has moved more into a bullish backwardation structure. The April contract is 64 cents a barrel more expensive than for May, indicating tight prompt supplies, compared with 29 cents at the beginning of last week.
© 2021 Bloomberg L.P.
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