(For Bloomberg fair value curves, see CFVL <GO>.)
June 12 (Bloomberg) -- West Texas Intermediate and Brent crudes surged to eight-month highs as violence escalated across northern and central Iraq, increasing the prospect of a return to civil war in OPEC’s second-biggest oil producer.
WTI advanced 2 percent while Brent gained 2.8 percent. Militants linked to al-Qaeda extended control over Mosul, Iraq’s second-largest city, and moved south toward Baghdad as Oil Minister Abdul Kareem al-Luaibi said U.S. planes may bomb northern Iraq. Iraqi crude production rose 50,000 barrels a day to 3.3 million last month, data compiled by Bloomberg show.
“The stakes are very high for the oil market,” said Helima Croft, an analyst at Barclays Plc in New York. “All it would take is one attack on an energy facility to get oil companies to evacuate personnel and reduce output.”
WTI for July delivery climbed $2.13 to $106.53 a barrel on the New York Mercantile Exchange. It was the highest settlement since Sept. 18. The volume of all futures traded was 72 percent higher than the 100-day average at 2:59 p.m. Prices are up 8.2 percent this year.
Brent for July settlement increased $3.07 to end the session at $113.02 a barrel on the London-based ICE Futures Europe exchange. It was the highest close since Sept. 9. Volumes were more than double the 100-day average. Brent closed at a $6.49 premium to WTI, up from $5.55 yesterday.
The European benchmark, which is used to price more than half of the world’s oil, is typically more sensitive to changes to the global supply-and-demand balance.
Gasoline and diesel futures rose more than WTI because the surge in Brent increases the cost of crude and fuel imports to the U.S. East Coast. Gasoline for July delivery climbed 8.29 cents, or 2.8 percent, to $3.0837 a gallon on the Nymex, the highest close since April 24. Ultra low sulfur diesel gained 8.5 cents, or 2.9 percent, to $2.9893 a gallon, also the highest settlement since April 24.
“Iraq had been a bright spot ramping up production and now we’re in the midst of a very ugly conflict,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Most of the production is in the south but if the rebel advance continues this could be threatened.”
Militants seized Mosul yesterday and halted repairs to the main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. They advanced on Tikrit and there were conflicting reports about whether the 310,000-barrel-a-day Baiji refinery had been captured.
“The fall of Mosul and the inability of the central government to put up a fight has got people to sit up and take interest,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $115 billion of assets. “Iraq had been in the background.”
The fighting hasn’t extended to the southern part of the country, which the U.S. Energy Information Administration says is home to three-fourths of Iraq’s crude production. The country shipped 5.43 million barrels of southern crude from the Basrah terminal on the Persian Gulf yesterday, according to the oil minister.
“The market is moving on regional instability fears,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd. in London. “Production has yet to be seriously affected by the upsurge in violence.”
Prime Minister Nouri al-Maliki’s Shiite-led government is struggling to retain control of Sunni-majority regions, and his army units in northern Iraq collapsed in the face of the advance of fighters from the Islamic State in Iraq and the Levant. The ISIL is among the mostly Sunni groups fighting to topple Syria’s President Bashar al-Assad.
“Syria’s war has been going on for years and has now moved into northern Iraq,” Sen said. “There are huge implications for the region as Sunni-Shia conflict grows. Iran, the major Shia power, is right next door and Sunni Saudi Arabia borders Iraq as well.”
The U.S. has yet to respond to a request from Iraq made in May to mount air attacks against militant training camps in western Iraq, according to two American officials who asked not to be identified discussing internal deliberations.
The Organization of Petroleum Exporting Countries at a meeting in Vienna yesterday kept its daily production target unchanged at 30 million barrels, leaving output below demand projected for this year. Ministers said that they were at ease with supply and demand in global oil markets.
While the formal limit remains unchanged, the burden will fall to Saudi Arabia to boost output to meet higher demand in the second half of 2014 as political turmoil constrains Libyan output and sanctions curb Iranian exports, according to Barclays Plc, Societe Generale SA and Energy Aspects.
Implied volatility for call options protecting against a 10 percent rise in August WTI futures increased to 20.99 percent as of 2:30 p.m., from 16.5 percent yesterday, reflecting concern that the rally will continue.
“Iraq is coming at the same time as output from Libya is offline,” Croft said. “It’s clear that significant quantities will be offline for a significant duration.”
--With assistance from Nayla Razzouk and Anthony DiPaola in Dubai.