By Stephanie Kelly

NEW YORK (Reuters] – The crude oil tanks at Cushing, Oklahoma’s storage hub, are less than three years ago, and the prices for further dated oil contract suggest that they will continue to drop for many months.

The U.S. has seen a surge in crude demand from refiners producing gasoline and diesel since the economic recovery has been complete. Global demand has led to other countries turning to the United States as a source of crude barrels. It also helped boost Cushing’s draws.

The drawdown on inventories is expected to persist in the near-term. This could increase prices, which have risen by around 25% over the past two months. It is expected that the discount for U.S. crude oil futures should remain narrow compared to international benchmarks.

Bob Yawger from Mizuho’s energy futures department stated that “only storage at Cushing has the potential for really rallying the market to its full potential.”

The Cushing stockpiles fell to 31.2million barrels last week. It is about half what inventories were a year ago.

According to Reid I’Anson (senior commodity analyst at Kpler), inventories have dropped due to a rise in U.S. demands. This has led domestic refiners, who keep crude oil at home, to supply fuel like gasoline and distillates for U.S. customers.

Additionally, the U.S. has taken a long time to rebound from 2020’s declines in production. The nation produced approximately 13 million barrels per day of oil (bpd) at the close of 2019. However, this number has fallen to less than 11.5million bpd in the past weeks. The same time, the product supply by refineries (a proxy for demand) is just 1% lower than pre-pandemic peak levels.

(For graphic on Cushing crude stocks fall to 3-year low – https://fingfx.thomsonreuters.com/gfx/ce/gkplgxembvb/Pasted%20image%201635275410559.png)

The spread between U.S. crude oil and Brent international benchmark has fallen as a consequence. The spread between U.S. crude oil and Brent delivered to Cushing has narrowed to $1.09/barrel this week, from $4.47 earlier. It was the largest spread since May 2020.

Refinitiv Eikon data also shows strong demand for U.S. oil in the short term. The premium paid for U.S. Crude this December over December 2022 was $12.48/barrel, highest since at least 2014.

Rystad Energy anticipates that refinery run times in America will increase from 500,000 to 600,000. barrels per hour over the next three month. This will outpace the production gains between 300,000 and 400,000 barrels each day. It also would keep WTI/Brent spread small.

“Only if OPEC, the Organization of the Petroleum Exporting Countries, intervenes with additional crude oil supply or if COVID rears it ugly head again, curbing the demand, will this high volatility come off,” stated Mukesh Sahdev (senior vice president, head of downstream, Rystad Energy).

(For graphic on U.S. crude spreads signal higher demand – https://fingfx.thomsonreuters.com/gfx/ce/mopanjrmyva/Pasted%20image%201635275590341.png)