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US Crude Oil Settles at $93 on Index Rebalancing

Tuesday, 8 Jan 2013 | 4:53 PM ET
Susana Gonzalez | Bloomberg | Getty Images

Brent crude rose in heavy trading on Tuesday and U.S. crude dipped as the beginning of the annual rebalancing of a key commodities index widened the spread between the two contracts.

Brent's premium to the U.S. West Texas Intermediate benchmark widened by more than 50 cents, with players citing the start of the annual reweighting of the S&P GSCI commodity index, one of two leading indices for investors.

The rebalancing, announced in early November, will increase the index's holdings of Brent and reduce its holdings of WTI as the output of Brent-related grades wanes and U.S. crude output surges. The passive index rolls its commodity holdings between the fifth and ninth trading days of each month.

"I know that they (the GSCI) are pulling some of the WTI and going into Brent as we're well supplied here," said Richard Ilczyszyn, chief market strategist of iitrader.com in Chicago.

The U.S. Energy Information Administration said on Tuesday that domestic production should jump 25 percent through 2014 as rapid improvements in horizontal drilling and hydraulic fracturing technology boost production from shale deposits.

In addition, traders were awaiting weekly U.S. inventory data from the American Petroleum Institute, due out later on Tuesday, which was expected to show a build in crude and refined product inventories.

Inventory reports released last week showed a steep drop in U.S. crude stockpiles at the end of the year, tied to refiners cutting imports to draw down inventories on the Gulf Coast for end-year tax purposes.

Brent crude futures rose 54 cents to settle at $111.94 a barrel, off earlier highs of $112.47 a barrel. U.S. light, sweet crude fell 4 cents to settle at $93.15 a barrel. (Read More: Airlines Scrap Clunkers Sooner as Oil Prices Bite)

The activity widened Brent's premium to U.S. crude to $18.79 a barrel after closing Monday at $18.21 a barrel.

The spread had narrowed from over $23 a barrel in mid-December ahead of the start of the Seaway pipeline expansion this week, which is expected to alleviate a glut of crude at the Cushing, Oklahoma, delivery point for the U.S. futures contract by sending more oil to the Gulf Coast refining hub.

Brent crude volumes surged, up 42 percent above the 30-day moving average, while U.S. crude trading was about 4 percent below that average in afternoon activity.

Colder weather in the Northern Hemisphere helped push U.S. heating oil futures up about 1 percent, while gasoline futures posted smaller gains.

Investors were also anticipating trade data from China later in the week, seeking confirmation the world's No. 2 oil consuming nation is reviving the pace of economic growth.

Trade numbers due on Thursday from China may show export growth rebounded from three-month lows in December, although weak demand in the United States and Europe, the country's two biggest customers, may temper the improvement.

"There are now very clear indications that this slowdown has come to an end," Credit Suisse analysts said in a report.

"The latest leading economic indicators show that global growth is gaining again - particularly in key commodity consuming countries such as China and the U.S."

European Central Bank policymakers will meet on Thursday and economists polled by Reuters were split on whether the bank would cut rates in 2013 after the regional economy shrank for three straight quarters last year. (Read More: OPEC Agrees to Keep 30 Million Bpd Oil Target: Delegates)