Brent Crude Retreats in Absence of Supply Disruptions in Iraq

Jun 23, 2014 3:22 pm ET

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

June 23 (Bloomberg) -- Brent crude futures slipped from the highest level in almost nine months as the widening conflict in Iraq has so far spared the country’s main oil-producing region.

Prices fell the most in more than a month as Iraq’s army fought with an al-Qaeda breakaway group to recapture territory near the borders with Jordan and Syria and U.S. Secretary of State John Kerry called on Iraqi leaders to unite against the militants. The violence hasn’t spread to the south, home to more than three-quarters of Iraq’s output.

“At these levels we really need to see further disruption to get another rally,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The militants have not gotten anywhere near the oil-producing regions.”

Brent for August settlement slid 69 cents, or 0.6 percent, to $114.12 a barrel on the London-based ICE Futures Europe exchange, the biggest decline since May 16. The grade rose to $115.71 on June 19, the highest since Sept. 9. The volume of all futures was 26 percent above the 100-day average for the time of day.

West Texas Intermediate for August delivery fell 66 cents, or 0.6 percent, to $106.17 a barrel on the New York Mercantile Exchange. The volume of futures traded was about 30 percent below the 100-day average. Brent was at a premium of $7.95 to WTI, compared with $7.98 on June 20.

Could Spread

President Barack Obama told CBS that the fighting could spread to allies like Jordan. The militants “are engaged in wars in Syria where -- in that vacuum that’s been created -- they could amass more arms, more resources,” he told CBS in an interview that will be aired in full today, according to a transcript.

On a visit to Baghdad, Kerry met with Iraqi Prime Minister Nouri al-Maliki, as well as ministers and party leaders. He told reporters after the talks that Iraq faces an “existential threat,” and said U.S. support “will be intense, sustained, and if Iraq’s leaders take the necessary steps to bring the country together, it will be effective.” He said Obama has reserved the right to decide on further action such as air strikes against ISIL.

‘Still Flowing’

“Even though the situation in Iraq is still very intense, the worst-case scenario that the militants will take over the oil-producing region didn’t happen, and that’s why the market is coming down,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The oil is still flowing.”

Iraq’s crisis flared when ISIL militants this month captured Mosul, the country’s biggest northern city, and advanced to towns just north of Baghdad. Iraq pumped 3.3 million barrels of oil a day last month, data compiled by Bloomberg show, second only to Saudi Arabia in the 12-member Organization of Petroleum Exporting Countries.

“It’s fear that drives prices up, not real supply disruptions,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said by e-mail. “The latter remain very unlikely.”

Southern Iraq accounted for more than 85 percent of the country’s 3.1 million barrels a day of production in April and all of its 2.5 million barrels a day of exports, which are shipped by tanker from the Persian Gulf, according to the latest data from the Ministry of Oil. Some crude can also be sent north to Turkey by pipeline from the autonomous Kurdish region and west to Jordan by truck.

Seasonal High

WTI slipped as U.S. crude supplies stayed near a seasonal high. Inventories probably declined 1.4 million barrels last week to 384.9 million, according to a Bloomberg survey before the Energy Information Administration releases its weekly report on June 25. They climbed to 399.4 million in April, the highest since the EIA began publishing weekly data in 1982.

“The fundamentals remain pretty weak, limiting the market’s advance,” McGillian said.

Gasoline futures dropped 2.01 cents, or 0.6 percent, to $3.1076 a gallon on the Nymex and ultra-low sulfur diesel decreased 1.86 cents, or 0.6 percent, to $3.0326.

Hedge funds increased bets on rising WTI prices to a record in the week ended June 17. Speculators raised their net-long position in the U.S. benchmark by 4.3 percent to 356,336 futures and options, the most in Commodity Futures Trading Commission data going back to 2006.

--With assistance from Grant Smith in London and Mark Shenk in New York.