Oil prices powered higher for a third day Wednesday, with the New York contract hitting a 14-month high, as traders fretted about unrest in Egypt and reacted to rapidly tightening supplies in the U.S. domestic market.
Unrest in Egypt came to a head as President Mohamed Morsi rejected the army's ultimatum to step down amid widening protests against his government. Crude was bolstered as members of Morsi's party said they had lost contact with him, raising fears of a coup that could add to instability in the region. Morsi later stepped down in a military ouster.
While the Suez Canal Authority said there was no sign of the political turmoil disrupting up to 2.4 million barrels per day of oil transit, markets remained on edge given that Libya and Syria are also immersed in conflict.
"I'm putting my money on the military to take control of the Suez Canal and make sure pipeline asset is secure," said John Kilduff at Again Capital. The political turmoil in Cairo "was worth $5 a barrel [the premium for West Texas Intermediate]. I can see prices falling down back under $100 as the military takes control" and Morsi exists the stage, he added.
While U.S. crude pushed above $101 a barrel, for a weekly rally of nearly 5 percent, many traders were still fixated on ructions in key spreads trade, with the premium of European Brent crude over U.S. WTI touching its highest since 2010 before beginning to unwind amid an easing short squeeze.
U.S. weekly inventory data showing that stockpiles fell by more than 10 million barrels, the biggest drop for this time of year in nearly 13 years, added to earlier gains that had been fuelled by worries the unrest in Egypt could destabilize the Middle East, which pumps a third of the world's oil.
The sharp drawdown in crude stocks is "something that nobody anticipated," said Addison Armstrong, director of market research with Tradition Energy in Stamford, Conn. Although analysts have been looking for inventories to ebb, the drop was nearly five times as large as forecasts.
U.S. gasoline futures and heating oil futures rose to their highest levels in more than a week and were last trading at $2.85 per gallon and $2.96, respectively.