US oil supply growing at record pace seen pressuring prices

NEW YORK (Bloomberg) - An unprecedented glut of crude in the US expanded last week, signalling further weakness for oil prices already near a six-year low.

Stockpiles at Cushing, Oklahoma, the delivery point for West Texas Intermediate futures traded in New York, rose 2.87 million barrels in the week ended March 13 to a record 54.4 million. Nationwide stockpiles are the highest since 1931.

Cushing supplies have soared 69 per cent this year, growing at the fastest pace since the Energy Information Administration began tracking inventories at the hub in 2004, as the shale boom boosted US output to the highest in three decades. That's left contracts for April delivery to US$12.42 a barrel below those a year out, the biggest discount in more than three years.

"US crude supply builds, particularly at Cushing, are unambiguously bearish," Mr Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone Wednesday. "There is room elsewhere but at Cushing the situation is tight any way you slice it."

April WTI rose US$1.20, or 2.8 per cent, to US$44.66 a barrel on the New York Mercantile Exchange on Wednesday. Futures touched US$42.03, the lowest since March 2009, before rebounding on speculation the US Federal Reserve will raise interest rates at a slower pace than previously estimated.

An oversupply of oil in the US has pushed futures into a structure known as contango. When the price difference is greater than the cost to lease tanks, traders can profit by storing oil and selling the higher-priced contracts for future delivery.

"This could damage the WTI contract," Mr John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone Wednesday. "This is something new, the prospect that tanks will fill to capacity, putting tremendous downward pressure on the contract."

Societe Generale lowered its projected 2015 WTI price to an average US$49.34 a barrel from US$51.30 previously, Mr Wittner said in an e-mailed report Wednesday. Cushing had 19 million barrels of additional storage space as of March 6, Mr Wittner wrote.

Nationwide crude inventories climbed to 458.5 million barrels last week, the most since the EIA began compiling the data weekly in 1982. Supplies have grown 76.1 million, or 20 per cent, in 10 weeks. Monthly data going back to 1920 show stockpiles haven't been this high since 1931.

Inventories along the Gulf Coast, home to about half of US refining capacity, also surged to an all-time high last week. Supplies in the region, known as PADD 3, rose 3.27 million barrels to 225.7 million.

The spread between WTI and Brent crude, the benchmark for more than half the world's oil, widened Wednesday. Brent for May settlement rose $US2.40, or 4.5 per cent, to US$55.91 a barrel on the London-based ICE Futures Europe exchange.

Crude output rose to 9.42 million barrels a day, the most since at least January 1983. The combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S.

Fewer rigs seeking oil and a rise in refinery activity will reduce stockpiles later this year, Sallee said. Drillers in the US have idled 709 rigs since the start of December, data from Baker Hughes show, cutting the number of active ones to the lowest since March 2011.

The contango may shrink as refineries return from seasonal maintenance, increasing crude demand. Plants operated at 88.1 per cent of their capacity on March 13, up from 87.8 percent the prior week.

"The drop in rigs is going to lead to lower production," Sallee said. "We're already coming out of turnaround season and will be operating from 90 to 95 per cent of capacity soon, which will alleviate the weekly builds in supply. This will be a huge shift for the domestic crude market."