By Arathy Somasekhar

HOUSTON U.S. crude oil stocks have fallen to their lowest level this year and likely will shrink further, analysts said, as record demand, producer supply cuts, weaker futures and rising storage costs all point to increasing drawdowns.

A tight crude market is poised to extend into 2024 and add upward pressure on global oil prices, they said. In a bullish sign, U.S. inventories last week dropped 10.6 million barrels, hitting the lowest level since December 2022's 420.65 million barrels. [EIA/S]

"We are already around 2022's close and I don't think we are getting a build in the second half of the year," said Al Salazar, a senior vice president at energy technology firm Enverus. "$100 a barrel (for Brent crude) is definitely within striking range."

Brent crude futures were trading at $88.08 a barrel on Friday, while U.S. crude futures were trading at $85.16 per barrel.

World demand is poised to hit a record high this year on strong air travel, power generation needs and surging Chinese petrochemical activity, the International Energy Agency forecast in August. Demand could grow this year by 2.2 million barrels per day (bpd) to 102.2 million bpd.

Oil supply will not match the rise in demand, the IEA said, adding it expects output to rise by 1.5 million bpd. Supply has fallen after Saudi Arabia voluntarily cut output in recent months and is likely to outweigh increases in U.S. shale and by Iran and Venezuela.

INVENTORY WITHDRAWALS

Overall, U.S. oil production could average 12.8 million bpd in 2023, but analysts are skeptical that shale gains can be sustained without a sharp increase in drilling activity. Active U.S. oil rigs this month fell to the lowest since February 2022. [RIG/U]

Near-term U.S. oil prices also are higher than futures, which has further encouraged withdrawals from inventory. U.S. crude for delivery in October recently traded about $6 higher than for delivery 12 months out.

Even when six-month futures in late July briefly rose above those for October delivery, U.S. stocks fell as central bankers raised interest rates, lifting costs to buy and store oil.

"It's going to be pretty difficult to incentivize that storage," said Christopher Haines, an analyst at Energy Aspects.

Prices of crude for future deliveries need to trade at least 50 cents above October prices before it is profitable to store crude, said Ernie Barsamian, chief executive of terminal storage clearinghouse The Tank Tiger.

That compares with estimates of 10-20 cents when interest rates hovered around 1%.

"We are likely moving to a new normal of lower inventory forward cover," analysts at Energy Aspects wrote in a note.

(Reporting by Arathy Somasekhar in Houston; Editing by David Holmes)