Oil prices ended higher for a third consecutive day on Wednesday, with the New York contract settling at a 14-month high, as traders fretted about unrest in Egypt and reacted to rapidly tightening supplies in the U.S. domestic market.
While oil prices pushed above $101, many traders were fixated on ructions in key spreads, with the premium of European Brent crude over U.S. WTI touching its highest since 2010 before beginning to unwind amid an easing short squeeze.
U.S. weekly inventory data showing that stockpiles fell by more than 10 million barrels, the biggest drop for this time of year in nearly 13 years, added to worries that unrest in Egypt could destabilize the Middle East, which pumps a third of the world's oil, and fuelled gains.
The sharp drawdown in crude stocks is "something that nobody anticipated," said Addison Armstrong, director of market research with Tradition Energy in Stamford, Connecticut. Although analysts have been looking for inventories to ebb, the drop was nearly five times larger than forecasts.
In Egypt, President Mohamed Mursi rejected an army ultimatum to step down. While the Suez Canal Authority said there was no sign of the political turmoil disrupting up to 2.4 million barrels per day of oil transit, traders were edgy.
"We've had two revolutions now in Egypt, and Algeria's economy is pretty bad, so all of the data are there to spark a revolution," said Paul Sullivan, an adjunct professor who teaches on global energy and security issues at Georgetown University in Washington, D.C.
"What happens in Egypt may determine what's going to happen in many other countries for some time to come."
Front-month U.S. crude oil futures ended $1.64 per barrel higher at $101.24, having touched a session high of $102.18. The contract blew past the 10- and 15-day moving averages on a continuation chart in the last two sessions, and gained 3.3 percent in the last three sessions.
Brent crude oil futures settled $1.76 per barrel higher at $105.76, the highest settlement price since June 19 for a three-day gain of 2.7 percent. Brent traded as high as $106.03, but failed to reach the 100-day moving average at $106.04.
Both U.S. gasoline futures and heating oil futures settled around 5 cents higher at $2.83 per gallon and $2.95, respectively.
This week's gyrations have shifted the front end of the WTI futures curve, bending it sharply into backwardation as the prompt month contracts surged. By Wednesday the short squeeze on spreads began to cool, with the most active spread between the U.S. September and October oil contracts ending near flat at around $1.06 after soaring as a high as $1.30, more than $1 higher than two weeks ago.