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Oil Prices Spike as Supply Glut Diminishes


NEW YORK ( TheStreet) -- Oil prices were pushing higher Wednesday as fears of an oversupply of U.S. crude eased.

West Texas Intermediate light sweet crude oil for December delivery was spiking 36 cents to $88.89 a barrel following a significant decline in crude oil stockpiles as reported by the Department of Energy of Wednesday. Traders who had been selling off just before the report were promptly replaced by a new influx of money, as the Department of Energy reported a draw of oil just over 4.7 million barrels last week, a gasoline drawdown of 3.33 million barrels and a distillate drawdown of 4.25 million barrels.

"A large drop in imports has brought a huge draw to crude stocks," says Matt Smith, commodity analyst at Summit Energy, a subsidiary of Schneider Electric.

Earlier, a Goldman Sachs analyst told Bloomberg that the steep discount at which WTI has been trading against Brent could narrow by up to 77%, by the end of 2012, as producers rapidly boost shipments by rail from the U.S. Midwest to refiners on the Gulf Coast during the first half of the year. The analyst said that this should "be enough to begin alleviating congestion," the report said.

With WTI oil prices pushing up towards $90 a barrel, "some of the shorts are getting scared," says MF Global senior markets strategist Richard Ilczyszyn, who added that the shorts will "run for the hills" if the oil price reaches beyond $91.

"If the S&P goes above 1230 and 1250, hedge funds say that money on sidelines will hit the market, and oil might be a spot where they want to participate," he continued.

There's been an almost 96% correlation between crude oil futures and the stock market over the last several months. These days, on a day-to-day basis, oil traders are often using the S&P 500 as a barometer for where oil prices might be headed. For instance, an S&P 500 bottom of 1070 corresponds with WTI crude at around $75 and Brent at around $99.

"We're riding the wave now," says BGC financial director Roger Volz. The technical analyst says a realization of the $90.60 to $90.90 levels in WTI would lead to "breakout levels" going forward, with the an achievement of the $89.30 level being an "upside accelerator" for prices.

"I see a good case for a pop [for WTI] here if equities continue to rally," Ilczyszyn agreed.

Brent crude oil for December delivery was also pushing higher, up 36 cents to $111.51, with the improvement of the mood of oil traders on the latest inventory reports. However, they expect the Brent prices to experience continuing pressure as more short-covering as well as new interest in WTI accelerates. Brent could gradually become more subdued, they say.

Earlier, Brent crude prices were drifting lower -- as WTI held in positive territory -- amid concerns about a slowdown in energy consumption, following Moody's cut of Spain's credit rating by two notches and the implication on Europe's economic growth.

Although market sentiment was lifted earlier by a report from the United Kingdom's Guardian newspaper saying that France and Germany agreed to increase the eurozone rescue fund to €2 trillion ($2.76 trillion), the news was promptly shot down by Dow Jones Newswires, which said the size of the fund is still being debated.

"Everyone is walking on pins and needles with regard to the eurozone," says Kingsview Financial trader Matthew Zeman.

Energy stocks were advancing. EOG Resources (EOG - Get Report) was gaining 2% to $87.76; Triangle Petroleum (TPLM - Get Report) was adding 4% to $4.52; Chevron (CVX - Get Report) was up 0.6% to $103.57; Chesapeake Energy (CHK - Get Report) was rising 1% to $27.64; Apache (APA - Get Report) was higher by 1.5% to $91.62; Kinder Morgan Energy Partners (KMP) was up 0.4% to $75.66; and Southern Union (SUG) was up 0.8% to $41.33.

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.
Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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