Crude-oil futures touched a nine-month high above $70 a barrel Thursday, supported by U.S. data which showed that strong demand and lower imports prompted a decline in gasoline and distillate supplies despite an increase in refinery activity.
Prices closed higher, but cut their gains by the end of the trading session as the initial rally calmed and the industry offered some updates on refinery unit restarts.
At the same time, the benchmark contract for natural-gas futures prices dropped 6% to its lowest level in more than two years as traders deemed supplies more than ample to meet demand for now.
The oil market is driven by "two main prongs right now," according to Zachary Oxman, a senior trader at Wisdom Financial. "The first is a light supply in the gas markets and the second is a very strong technical picture in the crude market."
The Energy Department's report on Wednesday showed unexpected declines in gasoline and distillate supplies, though crude-oil stocks climbed for a fourth straight week. See full story.
But "the most important news of the report came from the distillate section, showing inventories falling sharply and moving quickly to a potential shortage condition in the near term as the summer demand season heats up," said Oxman in e-mailed comments.
"Product inventory declines were caused by a reduction in imports and by continued strong demand from end users," he said.
Against that backdrop, crude oil for August delivery climbed as high as $70.50 a barrel in the regular trading session on the New York Mercantile Exchange, the contract's strongest intraday level since Sept. 11, 2006. Prices retreated a bit to close at $69.57, up 60 cents. They had already gained $1.20 on Wednesday.
July reformulated gasoline closed up 1.21 cents at $2.2667 a gallon while July heating oil finished at $2.0183 a gallon, down 0.63 cent after an earlier rise to $2.042.
An update on production at Valero Energy's (VLO :
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VLO, , ) McKee refinery in Texas likely helped cap crude's gains Thursday. Valero said the refinery continues to ram up its crude rates and is on track to run 150,000 barrels per day of crude by the end of this month, Dow Jones Newswires reported.
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BP, , ) has begun a restart of a 75,000 barrels per day crude unit, the news agency reported, citing a person familiar with the refinery.
Even so, "we're finally kind of breaking out of that trading range" for oil, said Phil Flynn, a senior analyst at Alaron Trading. "The catalyst is yesterday's report still. The refinery runs started to go up a little bit and that would increase demand for crude. Because of the strong demand, it's going to drive the price of the other products as well."
Refinery utilization climbed to 89.4% of capacity last week from 87.6% a week earlier, the Energy Department reported Wednesday.
But crude-oil imports fell 290,000 barrels per day last week and motor-gasoline demand averaged more than 9.5 million barrels per day in the past four weeks, up 1.4% from a year ago.
$80 oil?
The oil market continues to ignore the fact that U.S. crude-oil inventories are at high levels, their highest since 1988, according to some estimates. As of last week, supplies were at 349.3 million, up 3.2% from a year ago, Energy Department data showed.
"The refinery sector problems are the key to the overall rally," said John Kilduff, an analyst at Man Financial, in e-mailed comments.
He said he's not surprised crude prices are above $70, and "a new price record and $80 per barrel is likely this summer."
Gasoline prices at the retail don't necessarily have to hit a record, he said.
James Williams, an economist at WTRG Economics, said a number of factors could spur a rally in oil to $80.
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