Oil Heads for Year’s Biggest Weekly Gain as Iraq Unrest Worsens

Jun 13, 2014 8:36 am ET

(For Bloomberg fair value curves, see CFVL <GO>)

June 13 (Bloomberg) -- West Texas Intermediate crude headed for the biggest weekly advance since December and Brent gained as escalating violence in Iraq threatened supplies from OPEC’s second-largest oil producer.

Futures pared gains after earlier rising 1.1 percent in New York. Iraqi Oil Minister Abdul Kareem al-Luaibi speculated that U.S. planes may bomb his nation’s north as militants linked to al-Qaeda, that captured the city of Mosul this week, moved south toward Baghdad. Events in Iraq highlight the risks to oil supply from the nation, which is forecast to provide about 60 percent of OPEC’s output growth in the rest of this decade, the Paris- based International Energy Agency said.

“There has been some positioning for the potential for supply disruptions in Iraq,” Olivier Jakob, managing director of Switzerland-based researcher Petromatrix GmbH, said by phone. “It’s a major supplier.”

WTI for July delivery gained as much as $1.15 to $107.68 a barrel in electronic trading on the New York Mercantile Exchange and was at $106.83 at 1:04 p.m. London time. The contract rose $2.13 to $106.53 yesterday, the highest close since Sept. 18. The volume of all futures traded was more than double the 100- day average for the time of day. Prices have advanced 4.1 percent this week.

Brent for July settlement, which expires today, increased 0.3 percent to $113.35 a barrel on the London-based ICE Futures Europe exchange, after trading as high as $114.69. The August contract climbed 47 cents to $112.89. Front-month prices are up 4.4 percent this week, the most since July.

Iraq Fighting

“Crude over-reacted following the tensions in Iraq, so we see a small correction lower toward $113,” Myrto Sokou, an analyst at Sucden Financial in London, said by e-mail.

Iraq, a member of the Organization of Petroleum Exporting Countries, produced 3.3 million barrels a day of crude oil last month, data compiled by Bloomberg show.

The group that calls itself the Islamic State in Iraq and the Levant, known as ISIL, seized Mosul, forcing a halt to repairs at the main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. There were conflicting reports that Baiji, the site of Iraq’s biggest refinery, had been captured.

Huge Potential

“While Iraq’s production potential is huge, so are the political hurdles it is facing –- and nothing provides a clearer example of that risk than the military campaign,” the IEA said. “Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk.”

The country’s crude output capacity will increase by more than 1.2 million barrels a day in the six years through 2019, the IEA estimated in its monthly oil market report today.

“From a global oil perspective we expect the latest events in Iraq will sustain strong fundamentals for Brent crude,” Michael Lewis, global head of commodities research at Deutsche Bank AG, wrote in a report. “Of most concern would be any detrimental impact on investment in new capacity.”

Prime Minister Nouri al-Maliki’s Shiite-led government is struggling to retain control of Sunni-majority regions as his army units in northern Iraq collapsed amid the extremist advance. U.S. President Barack Obama said he won’t rule out using air strikes to help the government in Baghdad.

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration estimates is home to three- quarters of Iraq’s crude output. The country shipped 5.43 million barrels from the Basrah terminal on the Persian Gulf on June 11, according to al-Luaibi, the oil minister.

WTI may rise next week on concern the conflict in Iraq will disrupt shipments, according to a Bloomberg News survey. Seventeen of 26 analysts and traders, or 65 percent, forecast crude will increase while three said prices will decline.

--With assistance from Ben Sharples in Melbourne.