U.S. crude oil hit the highest level in 16 months on Thursday, rising above $108 a barrel on signs of a strengthening economy in the United States and narrowing its discount to North Sea Brent to the lowest in almost three years.
U.S. equity markets hit new record intraday highs shortly after the opening bell as a closely-watched survey of factory activity in the U.S. mid-Atlantic region leapt to its highest pace since March 2011, boosting the outlook for demand in the world's largest oil consumer.
"The market is rallying on good economic news," said Phil Flynn, an analyst at Price Futures Group in Chicago.
"The Dow Jones is good, the Fed's Philly index is good, employment data is good, and WTI is reflecting that right now."
U.S. crude oil, commonly referred to as West Texas Intermediate or WTI, hit a 16-month high of $108.04 a barrel and was up $1.37 at $107.85 at 10:42 a.m. EDT (1442 GMT).
Brent crude oil rose 13 cents to $108.74 a barrel, with its premium over U.S. crude touching a low of just 90 cents a barrel, the narrowest level since November 2010.
The price difference between the world's two most heavily traded crude oil contracts has narrowed sharply in recent weeks as increased pipeline capacity has allowed a glut of oil trapped around the WTI delivery point of Cushing, Oklahoma, to start draining to the coasts.
As recently as February the so-called Brent-WTI spread <CL-LCO1=R> had traded at more than $23 a barrel, but the U.S. benchmark has rallied by more than 25 percent in the last three months compared with just a 9 percent move higher in Brent.
WTI got a further boost on Wednesday after data showed refiners in the United States had consumed the highest amount of crude since August 2005 last week, while stocks at Cushing fell by almost 900,000 barrels. Total U.S. crude stocks have fallen by around 27 million barrels in three weeks.
A strong backwardation of the September-October U.S. futures contracts, when the front-month contract is stronger than the next one, also attracted investors and offered further support.
"We are seeing a very steep backwardation in the September-October contracts - the last time it was that high was in 1990 after the start of the Iraq War," said Olivier Jakob, analyst at Petromatrix.
"So all the flows are going into WTI because of the backwardation," he added. The August contract expires next Monday.