Brent Oil Climbs to Six-Week High as Ukraine Crisis Escalates

Apr 16, 2014 3:55 pm ET

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April 16 (Bloomberg) -- Brent crude climbed to a six-week high on the escalating Ukraine crisis. West Texas Intermediate traded near $104 a barrel after a government report showed that U.S. inventories surged last week.

Futures rose 0.2 percent in London. Ukraine accused Russia of fueling terrorism in its eastern regions as a move against separatists in the town of Kramatorsk stalled and NATO bolstered the defense of nearby nations. U.S. supplies increased 10 million barrels last week, according to Energy Information Administration data. The gain was more than five times as much as analysts projected in a Bloomberg survey.

“The risk in Ukraine is keeping oil up,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “People are getting nervous. If it went away, we could see oil drop $10.”

Brent for June settlement rose 24 cents to end the session at $109.60 a barrel on the London-based ICE Futures Europe exchange, the highest close since March 3. The volume of all futures traded was 6.9 percent above the 100-day average at 3:48 p.m. in New York.

WTI for May delivery rose 1 cent to settle at $103.76 a barrel on the New York Mercantile Exchange. Futures touched $104.99, the most since March 3, before the release of the EIA data at 10:30 a.m. in Washington. Volume was 53percent above the 100-day average. The U.S. benchmark crude’s discount to Brent for the same month widened to $6.57 a barrel.

Stalled Offensive

Ukraine’s offensive yesterday marked its first foray against armed activists holding government buildings in cities near the Russian border. Interior Ministry units ousted pro- Russian activists who had seized the airfield in Kramatorsk. Efforts to contain the insurgency risk escalating tensions with the government in Moscow, which warned of a potential civil war.

Russia has 40,000 troops massed on Ukraine’s border after its annexation of Crimea last month, the North Atlantic Treaty Organization said. NATO pledged to hold more military drills in eastern Europe and step up air and naval policing on its flanks.

U.S. crude stockpiles jumped to 394.1 million, the highest level since June, according to the EIA. They were projected to grow 1.75 million, the median of 10 analyst responses in a Bloomberg survey.

Inventories at Cushing, Oklahoma, the delivery point for WTI, fell 771,000 barrels in the week ended April 11 to 26.8 million, the lowest level since October 2009. Inventories at Cushing have fallen since the southern portion of the Keystone XL pipeline began moving oil to the Texas Gulf Coast from the hub in January.

Cushing Importance

“Some traders believe Cushing, Oklahoma, is the only spot relevant to WTI prices, which explains why prices aren’t lower,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The 10 million-barrel build is huge and should be reason to re-evaluate the supply situation. There’s an awful lot of oil on the Gulf Coast.”

Stockpiles along the Gulf of Mexico, known as PADD 3, rose 5.17 million barrels to 207.2 million, the most in EIA data going back to 1990.

Crude supplies on the U.S. West Coast, an area classified by the department as PADD 5, rose 3.96 million barrels to 55.8 million, the report showed. Changes in PADD 5 are sometimes ignored by traders because the region’s distribution system is isolated from the rest of the country.

“It was a sizable build, but 40 percent of the build occurred in PADD 5,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “I do think WTI does appear toppy. I’m bullish, but wary.”

Surging Output

U.S. crude production increased 72,000 barrels a day to 8.3 million, the most since April 1988, the EIA said. Output has surged this year as a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies trapped in shale formations.

Refineries operated at 88.8 percent of capacity, up 1.3 percentage points from the prior week and the highest level since Jan. 10, the EIA said. The Gulf Coast is home to 46 percent of U.S. refining capacity.

“The glut in supply has moved from Cushing to PADD 3,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “It’s always a surprise to see PADD 3 supplies gain when utilization is up.”

Supplies of distillate fuel, a category that includes heating oil and diesel, fell 1.28 million barrels to 111.9 million last week. Gasoline stockpiles dropped 154,000 barrels to 210.3 million.

Implied volatility for at-the-money WTI options expiring in June was 17 percent, down from 17.4 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 688,114 contracts at 3:49 p.m. It totaled 517,573 contracts yesterday, 3.9 percent below the three-month average. Open interest was 1.67 million contracts.

--With assistance from Barbara Powell in Houston.