(For Bloomberg fair value curves, see CFVL <GO>)
Aug. 28 (Bloomberg) -- West Texas Intermediate crude surged to the highest level since May 2011 on concern that the conflict in Syria will spread and threaten oil supplies from the Middle East. Brent climbed to a six-month high in London.
Futures rose 1 percent in New York while gasoline advanced for the fifth time in six days. The U.S., France and Britain moved closer to a military strike against Syria as they laid the legal groundwork to justify action after the alleged use of chemical weapons. Brent may advance to $150 a barrel if shipments are disrupted, Societe Generale SA said. Libya said output may have dropped below 200,000 barrels a day, the least since the 2011 uprising against Muammar Qaddafi.
“This market is reflecting anxiety about the Middle East,” said Adam Wise, who helps manage a $6 billion oil and gas bond portfolio as a managing director at Manulife Asset Management in Boston. “As long as tension escalates in the region, specifically in Syria and Iran, you can expect prices to move higher. More news-driven price spikes are on the table.”
WTI crude for October delivery rose $1.09 to $110.10 a barrel on the New York Mercantile Exchange, the highest settlement since May 3, 2011. Trading was 9.8 percent above the 100-day average at 2:40 p.m. Prices are up 20 percent this year.
Brent for October settlement advanced $2.25, or 2 percent, to $116.61 a barrel on the London-based ICE Futures Europe exchange. It was the highest close since Feb. 19. Volume was 56 percent above the 100-day average. The European benchmark crude traded at a $6.51 premium to WTI, the most since June 21.
Gasoline for September delivery increased 6.04 cents, or 2 percent, to $3.0945 a gallon on the Nymex, adding to yesterday’s 2.8 percent gain.
Crude and U.S. equities both rose after moving in opposite directions yesterday, when WTI rallied 2.9 percent as the Standard & Poor’s 500 Index slid 1.6 percent. The 4.5 percentage-point divergence was the widest since November 2011.
WTI call options surged as futures rallied. The implied volatility of October calls protecting against a 10 percent rise in futures prices jumping to 35 percent at 2:36 p.m. from 21.7 on Aug. 26 and 28.9 yesterday.
U.S. officials planning potential military strikes on Syria aren’t limited to a one-day operation, an administration official said, as the United Nations Security Council’s permanent members considered a resolution condemning the suspected attack. The U.S. and its allies are still working to define goals for a military strike on Syria, said the official, who asked not to be identified discussing war-planning efforts.
“The market is feeding on itself, headline by headline,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “Prices rose to $115 on the unrest in Libya two years ago and to $110 on Iran’s nuclear program. There’s no telling when this rally will flame out.”
Brent may “spike briefly” to $150 a barrel if the conflict in Syria spreads to other parts of the Middle East, causing supply cuts, Societe Generale said in a report e-mailed today. The contract traded at $147.50 on July 11, 2008, the highest intraday price on record.
“The concern is that an attack on Syria will reverberate through the region, increasing the spillover into other countries and possibly resulting in a larger supply disruption elsewhere,” said Michael Wittner, Societe Generale’s head of oil market research in New York said in the report. Even if flows aren’t cut oil may climb to $125 in coming days, he said.
The Middle East accounted for 35 percent of global oil output in the first quarter of this year, according to data from the International Energy Agency.
WTI tumbled 9.9 percent in May 2011 as the North Atlantic Treaty Organization bombarded Libya and U.S. forces killed Osama bin Laden. The contract tumbled 15 percent in March 2003 as an U.S.-led coalition invaded Iraq with the aim of toppling Iraqi President Saddam Hussein.
“We could easily see significant selling once the first bombs drop,” Schork said.
Libya’s oil production fell as protests over pay and allegations of corruption spread to fields operated by Eni SpA and Repsol SA, according to officials at National Oil Corp. The North African country was pumping 1.4 million barrels a day in March, according to a Bloomberg survey.
“Geopolitical risk is driving the market higher,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The escalation in Syria is coming after Libyan production has tumbled. The bulls seem intent on driving WTI close to $115.”
A technical indicator shows Brent futures may be rising too quickly for further gains to be sustainable. The 14-day relative strength index yesterday surged above 70 for the first time since February, signaling the market is overbought, according to data compiled by Bloomberg. Today’s reading exceeded 75.
The Energy Information Administration said U.S. crude stockpiles rose 2.99 million barrels to 362 million last week.
“Absent the Middle Eastern news, we would be moving lower,” Wise said. “This is a very bearish report, but the market’s ignoring it.”
U.S. crude production increased 1.2 percent to 7.61 million barrels a day, the highest level since 1989, according to the EIA, the Energy Department’s statistical unit. Output has surged as the combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in the central part of the country.
Hedge funds cut bullish bets on WTI in the week ended Aug. 20, data from the Commodity Futures Trading Commission showed on Aug. 23. Funds and other speculators boosted bullish bets on Brent in the same period, data from the ICE Futures Europe showed on Aug. 26.
Electronic trading volume on the Nymex was 591,882 contracts as of 2:35 p.m. It totaled 700,944 contracts yesterday. Open interest was 1.86 million contracts.
--With assistance from Grant Smith and Lananh Nguyen in London. Editors: Richard Stubbe, Charlotte Porter