Brent Oil Climbs to Nine-Month High on Iraq; WTI Discount Widens

Jun 18, 2014 3:35 pm ET

June 18 (Bloomberg) -- Brent oil rose to a nine-month high as Iraqi forces battled extremists north of Baghdad. West Texas Intermediate fell, widening the discount to the European grade, after supplies increased at Cushing, Oklahoma.

Islamist insurgents battled the military for control of the Baiji refinery in northern Iraq, the country’s largest. Local police said militants are inside the plant, while the central government said its elite troops are in control. WTI slipped after the U.S. Energy Information Administration said supplies at Cushing, the delivery point for futures on the New York Mercantile Exchange, rose 247,000 barrels to 21.4 million last week, the first gain in 10 weeks and the second since Jan. 24.

“The global political situation continues to be the main driver of oil,” said Adam Wise, who helps run a $6 billion oil and gas bond portfolio as a managing director at John Hancock in Boston. “Until there’s some stability in Iraq, the oil market will remain extremely volatile.”

Brent for August settlement rose 81 cents, or 0.7 percent, to end the session at $114.26 a barrel on the London-based ICE Futures Europe exchange. It was the highest close since Sept. 6. The volume of all futures traded was 21 percent above the 100- day average at 2:49 p.m.

WTI for July delivery declined 39 cents, or 0.4 percent, to settle at $105.97 a barrel on the New York Mercantile Exchange. The contract touched $107.68 on June 13, the highest since Sept. 19. Volumes were 55 percent higher than the 100-day average.

Premium Widens

The European benchmark closed at an $8.67 premium to the August WTI contract, up from $7.58 yesterday and the widest spread since May 15. Brent, 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.

“As the situation in Iraq deteriorates, you are going to see the differentials between WTI and global oils increase,” Wise said.

Fuel markets climbed with Brent. An increase in the price for the North Sea oil adds to the cost of crude and fuel imports to the U.S. East Coast.

Gasoline for July delivery rose 0.71 cent to $3.0982 a gallon on the Nymex, the highest settlement since July 19. Ultra low sulfur diesel gained 2.21 cents, or 0.7 percent, to settle at $3.0401. Diesel closed at the highest level since March 4.

A fuel tank at Baiji refinery caught fire after shelling by militants, according to the Salahuddin provincial police command. The refinery halted operations yesterday because its storage tanks were full, according to Iraq’s Oil Ministry.

Iraq Evacuations

BP Plc has evacuated non-essential production staff from Iraq, a company spokesman said today. BP is still operating in southern Iraq, the spokesman said, confirming remarks made by CEO Bob Dudley yesterday in Moscow. Exxon Mobil Corp. carried out an evacuation of personnel at its facilities in Iraq, Reuters reported, quoting a government official.

The U.S. is conducting aerial drone operations over northern Iraq at the government’s request, Treasury Secretary Jacob J. Lew said in Jerusalem today. The only option President Barack Obama has ruled out is ground troops, White House spokesman Jay Carney told reporters at a daily briefing.

Iraqi Prime Minister Nouri al-Maliki said the extremist threat his forces are battling will spread to neighboring countries. Clashes between Islamic State in Iraq and the Levant fighters and the government forces have broken out across northern and central Iraq since the fall of Mosul last week.

Southern Iraq

The fighting hasn’t spread to the south, which the EIA estimates is home to three-quarters of Iraqi output.

“Unless the southern oil fields are threatened, WTI oil prices seem unlikely to breach $110 a barrel,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $120 billion of assets.

Oil also slipped as U.S. refineries operated at 87.1 percent of capacity in the seven days ended June 13, the lowest rate since March.

“WTI has come off a bit because of the gain at Cushing and the fall in refinery activity,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York.

Nationwide crude stockpiles fell 579,000 barrels to 386.3 million last week, the report showed. Gasoline stockpiles increased 785,000 barrels to 214.3 million. Supplies of distillate fuel, a category that includes heating oil and diesel, rose 436,000 barrels to 119.4 million.

U.S. crude production increased 17,000 barrels a day to 8.477 million, the most since October 1986. Output has surged this year as a combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations, including the Bakken in North Dakota and the Eagle Ford in Texas.

“U.S. supply growth remains robust and is countering some of the supply problems in the Middle East, but transportation difficulties limit the ability of US oil production to satisfy global, or even domestic demand,” Haworth said.