Oil rallies on gasoline jump, worries over drop in U.S. drilling

By Barani Krishnan

NEW YORK (Reuters) - Oil prices rallied on Monday, with U.S crude up as much as 3 percent, amid a jump in gasoline prices and on concerns that U.S. crude production may slow as drilling steadily declines.

Global oil benchmark Brent gained 2 percent, narrowing its premium over U.S. crude to around $2 a barrel after briefly falling below that key level due to improved fundamentals for U.S. crude.

Gasoline futures on the New York Mercantile Exchange were up about 3 percent after a fire was reported on Saturday at an unit of Husky Energy's 155,000 barrel-per-day refinery in Lima, Ohio.

The premium for refining gasoline from crude, known as gasoline crack, reached its highest in nearly two weeks, rising a combined 17 percent over the past two sessions.

In crude oil, market intelligence firm Genscape added to positive sentiment by estimating a draw of nearly 810,000 barrels in the week ending Sept. 15 from storage tanks at Cushing, Oklahoma, the main delivery point for U.S. crude futures, according to traders who have seen the data.

Cushing stocks fell nearly 2 million barrels in the week to Sept. 11, the biggest draw since February 2014, U.S. government data showed.

Crude traders also focused on the soon-to-expire front-month contract in the West Texas Intermediate (WTI), which serves as the U.S. benchmark. WTI's October contract will go off the NYMEX board after Tuesday's settlement, and November will move up as the front-month.

"We're seeing some crackspread action as we move towards WTI expiration and it's all contributing to the bump higher," said Donald Morton, energy trader for Herbert J. Sims & Co, an investment banking house based in Fairfield, Connecticut.

U.S. crude's front-month was up $1.40, or 3.1 percent, at $46.08 a barrel by 12:17 p.m. EDT (1617 GMT).

The front-month in Brent rose 90 cents, or about 2 percent, to $48.37.  

U.S. drillers have cut the number of oil rigs in operation for three straight weeks.

Oil-rig reductions suggest a decline of more than 250,000 barrels per day (bpd) in U.S. crude production between the second and fourth quarters of this year, Goldman Sachs said in a report.

Energy consultancy Wood Mackenzie estimated that $1.5 trillion of "uncommitted spending on new conventional projects and North American unconventional oil" was uneconomic at even $50 a barrel.

"While operators are seeking an average cost reduction of 20-30 percent on projects, supply chain savings through squeezing the service sector will only achieve around 10-15 percent on average," Wood Mackenzie said in a report.

(Additional reporting by Christopher Johnson in London and Henning Gloystein in Singapore; Editing by Bernadette Baum and Marguerita Choy)