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Crude Oil Stays Pumped

The commodity continues reaching new peaks, even as market structures realign.

Crude futures are on a tear in Wednesday's trading session at the New York Mercantile Exchange, soaring to an intraday record of more than $132 on a bullish oil inventory report from the Energy Department and a falling dollar.

West Texas crude for July delivery reached another new intraday high, trading up $3.28 at $132.26 a barrel, while Brent crude was trading at $132.05 a barrel.

Near-term natural gas was adding 26 cents to $11.77 per million British thermal units.

The Energy Information Administration's petroleum report for the week ending May 16 showed a large draw in oil stores that missed analyst forecasts by wide margins. Crude stores fell 5.3 million barrels during the week. Analysts were expecting a 300,000 barrel build in oil stores, according to a



Gasoline stores also surprised the market, falling 755,000 gallons during the week against a prior analyst consensus of a 250,000 build. Distillate inventories rose by 730,000 barrels, 700,000 barrels fewer than analysts were expecting.

Total U.S. crude stores, excluding the Strategic Oil Reserve, were 320.4 million barrels. This is in the middle of the average range for this time of year, according to the EIA report. Gasoline stores are in the lower end of their 5-year average range.

Refinery utilization increased 1.3 percentage points to 87.9%, down roughly 2 percentage points from its 5-year average, and down roughly 6 percentage points from where normal summertime utilization rates were before Hurricane Katrina struck the gulf coast in 2005.

Largely unnoticed in the trading session was the fact that although the price of crude took off in reaction to last week's fall in crude stocks, the inventory data had no effect on the term structure for either WTI or Brent crude. The spread between July and August WTI was recently down 3 cents - an insignificant figure. This indicates that while day-traders took advantage of the larger-than-normal weekly decline in oil stores to rake in some extra profits, the drop in oil stores did not change the sentiment of the broader energy market concerning the state of oil supply.

The structure of both WTI and Brent crude futures curves have recently undergone jaw-dropping transformations. In the past three months Brent moved from strong backwardation into a mild contango. WTI has also flattened out of strong backwardation and will likely be in contango in a matter of weeks, according to Stephen Schork, editor of The Schork Report.

A commodity is in backwardation when its near-term contract is more expensive than the following month's contract, making the shape of its futures curve downward-sloping. Contango is when the near-term contract is less expensive than the following month's contract, giving the commodity an upward-sloping curve.

The nature of a crude oil's term structure tells you what the broad energy market thinks about the futures state of oil supplies, according to Schork. Oil in backwardation indicates that the market is concerned about tight oil supplies, because buyers will pay a premium to assume ownership today rather than waiting for a better price later but risking that there might not be any oil to buy. Oil in contango signifies that demand for the commodity is less anxious, and that future supply constraints are not a major concern.

Because Brent and WTI crude didn't back away from contango on today's oil inventory data, long-term investors and traders were apparently unfazed by the news and are still betting their chips that domestic oil stores are well supplied, according to Tim Evans, commodity analyst at Citigroup Global Markets. "The inventory data was a big yawn," Evans said. The crude futures curves say that we have a comfortable supply of crude oil to work with."

Meanwhile, a sharp a sharp downward move in the U.S. dollar gave oil an added nudge upward. The greenback slid nearly a cent against the euro, which appears to be quickly on pace to test the significant $1.60 resistance level. The U.S. dollar index, which measures the dollar's value against a basket of global currencies, is down half a cent to 72.07.

Elsewhere, integrated energy stocks are largely moving higher.

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