Crude Output Slumps Following Harsh Winter, Even as Oil Prices Climb to Record Levels

As the winter chill fades away, crude output is slumping while oil prices are reaching record levels. This morning, WTI futures have increased by $1.14/bbl to surpass $84/bbl for the first time in over five months. This rise is attributed to escalating geopolitical tensions in the Middle East and recent reports about Ukrainian drones targeting Russia’s third-largest oil refinery, damaging a processing unit with a capacity of approximately 155,000 bpd.

Prompt crude concluded the day yesterday over 40 cents higher, reaching the highest levels since October 2023, driven by the rising unrest in the Middle East. The May 2024 versus June 2024 WTI prompt spread saw a day-over-day increase of 14 cents, marking the highest point since early March due to robust crude cash prices at Cushing. In parallel, the spread between June 2024 and July 2024 Brent prompt widened by 8 cents yesterday, indicating a tightening near-term supply outlook. This adjustment reflects anticipations of a strengthening demand landscape in China, buoyed by positive economic data.

Looking ahead, the OPEC+ ministerial panel is set to convene tomorrow, with expectations leaning towards maintaining the current oil output policies without recommending significant changes.

Transporting key fuels such as diesel, gasoline, and jet fuel via Colonial’s main pipeline to Greensboro, North Carolina, has reached its highest level in four months. This spike in transportation costs is a result of shippers eager to capitalize on the growing profitability seen in refinery margins. Specifically, the tariff for utilizing space on Colonial’s Line 1 has jumped to 3.5 cents per gallon from just 1 cent at the beginning of the week. This increase has been sustained over the past four days, indicating a robust demand for pipeline capacity. In fact, Line 1 has been operating at full capacity up to the most recent cycle, reflecting the high competition for access among shippers.

In the wake of the Francis Scott Key Bridge collapse in Baltimore last week, Colonial issued an allocation notice for Line 32, which serves as a conduit for delivering fuel from Maryland’s Dorsey Junction to the Curtis Bay neighborhood in Baltimore. The notice, affecting the cycle spanning April 9 to April 16, reflects the ongoing adjustments within the industry to maintain fuel supply and distribution in light of infrastructural challenges.

In January, U.S. crude oil production saw a decline to 12.5 Mbpd, marking a 6% reduction from December’s peak, as a result of adverse weather conditions, according to the Energy Information Administration’s report released on Friday. The state of Texas, a leading oil producer, experienced a 5% drop in its crude oil output to 5.4 million bpd, while North Dakota’s production decreased by nearly 13% to 1.1 Mbpd.

Harsh winter storms that hit in January are to thank, impacting oil production and refining capacities in Texas by bringing snow and rain across a large part of the country. The historic highs witnessed in U.S. crude oil production, reaching 13.3 Mbpd during December, were contributed to by large outputs from Texas, North Dakota, and New Mexico, all of which set production records in the preceding months, per EIA data.

The cold spell in January had a particularly severe impact on North Dakota, where oil production was reported to have halved to between 600,000 and 650,000 bpd, according to the state’s pipeline authority at that time. The adverse weather conditions also affected other key oil-producing regions in the U.S.

The inclement weather led to a decrease in motor fuel consumption during January as well. The EIA’s monthly petroleum status report highlighted a decline in gasoline product supplied, a measure of demand, by approximately 600,000 bpd down to 8.2 Mbpd, the lowest level seen in two years.