U.S. crude jumped to a nine-month high above $99 a barrel on Tuesday as turmoil in the Middle East unsettled investors, while signs of tightening supply in the U.S. Midwest strengthened prompt U.S. crude prices relative to other contracts.
The spread between European Brent and U.S. WTI crude for September narrowed to less than $4 a barrel, the lowest since early 2011, as some traders rushed to cover short bets. Goldman Sachs closed its trade recommendation after the spread on the August contracts collapsed from over $23 in February to go well below its target of $5.
U.S. inter-month spreads stretched to their widest in years, with the Sept/Oct WTI spread jumping at one point to a record high of $1.24, up from just 34 cents a barrel last week.
The dramatic strengthening at the front end of the U.S. crude oil curve has been tied to the restart last month of BP's revamped 413,000 barrel-per-day Whiting refinery, which is expected to help absorb more Canadian crude oil supplies that might otherwise fill up tanks at Cushing, Oklahoma, the delivery point for the U.S. oil futures contract.
"Refinery runs are very high, and they've got room to run higher."
Oil also got a boost from turmoil in the strife-ridden Middle East, where Libyan oil output has fallen by a third after protesters shut several oilfields and anti-government demonstrations in Egypt have raised concerns about the stability of the whole region.
Brent crude futures for August delivery settled up $1.OO to $104.00 a barrel after rising 0.8 percent the previous day.
U.S. crude futures for August settled $1.61 higher at $99.60, after getting within 13 cents of the psychologically key $100 mark and reaching its highest level since Sept. 2012.
"We're in the process of seeing our Midwest glut drain before our eyes, and it's causing a revaluation of the barrels depending on where they sit on the curve."
Traders and brokers also said that market players who were short September versus October were being forced out as the market moved against them.
"Right now there are a large number of market participants who play the short spread trade getting squeezed on September WTI. This move in Brent-WTI caught a lot of people unaware," said a hedge fund manager active in the energy space.