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OIL FUTURES: Crude pushes to fresh highs as market eyes tighter supply outlooks

Highlights

US crude stocks expected down 500,000 barrels

WTI backwardation hits three-month high

Gas-to-oil switching supports diesel demand

Crude oil futures settled at fresh highs Oct. 11 as the market eyed ever-tightening supply outlooks driven in part by surging global natural gas pricing.

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NYMEX November WTI settled $1.17 higher at $80.52/b and ICE December Brent climbed $1.26 to $83.65/b.

"Energy crisis uncertainty will likely keep crude prices heading higher until the oil market seems likely it is heading towards balance, OANDA senior market analyst Ed Moya said in a note. "The natural gas shortage is not going away anytime soon and that will keep providing additional demand for crude."

NYMEX November RBOB settled up 1.17 cents to $2.3779/gal and November ULSD moved 4.13 cents higher to $2.5150/gal.

Total US commercial crude stocks likely declined 500,000 barrels to 420.4 million barrels in the week ended Oct. 8, analysts that S&P Global Platts surveyed said Oct. 11.

Inventories typically climb around 3 million barrels during the period, US Energy Information Administration data shows, as refinery runs slow with the onset of shoulder season maintenance. The expected counter seasonal draw would leave stocks 7.7% behind the five-year average of EIA data, out from around 7% the week prior.

Tightened US supply has supported prompt-month WTI prices that has contributed to the widening of backwardation in the WTI forward curve. Front-month WTI settled at a $7.33/b premium to the year-ahead contract Oct. 11, marking the widest backwardation since mid-July.

"The oil market is very tight, with significant lack of supply on the oil side and energy in general," Michael Poulsen, Senior Risk Oil Manager at Global Risk Management said. "This volatility in oil, gas and energy is here to stay for some time, with no quick solutions."

US refinery utilization, meanwhile, is expected to fall to 89.1% of capacity, down 0.5 percentage point from the week prior, analysts said. Despite expectations of slowing runs, at this level utilization would remain nearly 6% above the five-year average, marking the strongest run rate relative to historic norms since September 2018.

Refinery runs have been supported by strong margins. US Gulf Coast WTI MEH cracking margins averaged $16.19/b in the week ended Oct. 8, S&P Global Platts Analytics data shows, up from a September average of $14.63/b.

"Transportation fuels are leading the charge, as consumers return to the road. High gas prices are inducing gas-to-oil switching in heating and industrial sectors," ANZ analysts said in an Oct. 11 report.

"We are seeing a continued recovery in demand for transportation fuels as mobility restrictions ease across the globe. All up, we have raised our demand forecast by 450[,000] b/d," the analysts added.

Platts Analytics data shows the USGC ULSD crack versus WTI MEH averaged $21.29/b in the week to Oct. 8, up from $17.75/b in September. Strong harvest season diesel demand has also supported cracks in the Midwest. The ULSD crack versus WTI Cushing averaged $25.55/b last week, Platts Analytics data shows, up from $21.92/b last month.