Brent Advances on Iraq, Pushing Premium Over WTI to June High

Jun 16, 2014 3:40 pm ET

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June 16 (Bloomberg) -- Brent crude climbed, extending its premium over West Texas Intermediate to the highest this month, as the crisis in Iraq showed no signs of abating.

The August Brent contract gained 0.4 percent. Iraq Prime Minister Nouri al-Maliki is fighting to reverse the advance of militants, who captured Iraq’s largest northern city and other towns last week. The fighting hasn’t spread to the south, which the U.S. Energy Information Administration says is home to three-quarters of Iraq’s crude output.

“The oil market is reacting positively to the unrest,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “If Baghdad really starts to run into trouble, it’s going to be very difficult to maintain production.”

Brent for August settlement gained 48 cents to end at $112.94 a barrel on the London-based ICE Futures Europe exchange. The July contract closed at $113.41 on June 13, the highest for front-month futures since Sept. 9. The volume of all futures was 4.3 percent below the 100-day average for the time of day.

WTI for July delivery fell 1 cent to $106.90 a barrel on the New York Mercantile Exchange. The contract climbed to $106.91 on June 13, the highest close since Sept. 18. Volume was 17 percent higher than the 100-day average. The European benchmark crude ended at a premium of $6.64 to August WTI, the most since May 30.

Driving Fear

“The uncertainty about what could happen in Iraq is driving a lot of fear into the market,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Iraq’s army killed more than 279 fighters from the Islamic State in Iraq and the Levant and destroyed 50 of the group’s vehicles within 24 hours, military spokesman Qassim Ata said in a televised news conference yesterday.

Rapid territorial gains by militants in Iraq increased the risk of price swings in Brent, according to Bank of America Corp. and Morgan Stanley.

“Persistent headline risk could change the psychology of oil markets by jeopardizing supply growth and removing complacency about oil prices,” Adam Longson, an analyst at Morgan Stanley in New York, said in a report.

The 20-day historical volatility of Brent futures rose to 12.9 percent today, the highest since May 7, according to exchange data compiled by Bloomberg. It was at 7.2 percent on June 3, the least since the contract began trading in 1988.

Iraq Production

Iraq pumped 3.3 million barrels a day of crude in May, second in the Organization of Petroleum Exporting Countries only to Saudi Arabia, according to data compiled by Bloomberg. The country’s three biggest oilfields -- Rumaila, West Qurna-2 and Majnoon -- lie in the south.

“The real concern is a disruption to production and exports in southern Iraq,” Mike Wittner, head of oil market research at Societe Generale SA in New York, said in a report. “The threat of that happening is not imminent, but it is serious.”

The country’s 2.58 million barrels a day of exports in May were all shipped from the south while northern shipments via the Kirkuk-Ceyhan pipeline have been halted since March 2, Asim Jihad, an oil ministry spokesman, said June 1.

ISIL, a breakaway al-Qaeda Sunni Muslim group that seized Iraq’s second-largest city of Mosul last week, has control of the pipeline to the 310,000 barrel-a-day Baiji refinery, the country’s biggest.

OPEC Quota

OPEC is monitoring the situation in Iraq and will maintain its production limit of 30 million barrels a day for now, Secretary-General Abdalla El-Badri said at the World Petroleum Congress in Moscow today.

WTI, the U.S. benchmark, was little changed as domestic inventories remained near the highest level for this time of year.

Gasoline futures gained 0.5 percent to $3.0718 a gallon on the Nymex. The crack spread, the profit to process WTI oil into gasoline, rose to $22.12 a barrel based on front-month contracts. Ultra-low sulfur diesel climbed 0.3 percent to $2.9979.

“Iraq is going to have less impact on WTI than Brent,” O’Grady said. “Gasoline and diesel follow Brent a lot.”