Brent Crude Increases on Iraq Violence; WTI Holds Above $106

Jun 24, 2014 5:03 pm ET

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June 24 (Bloomberg) -- Brent crude rose for the first time in three days as an al-Qaeda offshoot consolidates its control over areas of Iraq, OPEC’s second-largest producer. West Texas Intermediate settled above $106 a barrel for the eighth time in nine days.

Iraqi forces have been battling the Sunni Islamic State in Iraq and the Levant for control of the Baiji refinery north of Baghdad for almost two weeks. The crisis flared this month when ISIL captured the northern city of Mosul on June 10 and advanced to towns just north of Baghdad. A government report tomorrow is projected to show that U.S. crude supplies fell a fourth week.

“The strength of the oil market is a reflection of the continuing fighting in Iraq,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “ISIL forces continue to advance and we’re getting conflicting news about the Baiji refinery. If not for the troubles in Iraq we would be looking at lower prices.”

Brent for August settlement increased 34 cents, or 0.3 percent, to end the session at $114.46 a barrel on the London- based ICE Futures Europe exchange. Futures touched $115.71 on June 19, the highest since Sept. 9. The volume of all futures traded was 36 percent above the 100-day average at 4:40 p.m.

WTI for August delivery slipped 14 cents to settle at $106.03 a barrel on the New York Mercantile Exchange. Futures touched $107.73 on June 20, the highest intraday price since Sept. 19. The volume of all futures traded was 23 percent below average.

API Report

Prices extended losses after the American Petroleum Institute was said to report that U.S. crude inventories increased 4 million barrels last week, according to TradeTheNews.com, an information service. Supplies at Cushing, Oklahoma, the delivery point for WTI futures, climbed 420,000 barrels. Futures slipped 33 cents to $105.84 at 4:40 p.m. in electronic trading.

The European benchmark crude closed at an $8.43 premium to WTI, up from $7.95 yesterday. Brent, which is used to price more than half of the world’s oil, is usually more sensitive to changes to the global supply-and-demand balance.

Iraq pumped 3.3 million barrels a day last month, data compiled by Bloomberg show, making it the largest producer after Saudi Arabia in the 12-member Organization of Petroleum Exporting Countries. The fighting hasn’t spread to the south, home to more than three-quarters of Iraq’s crude output.

“You aren’t going to see a meaningful drop in oil prices unless ISIL collapses,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The most likely outcome is that they won’t be able to move to Baghdad and a stalemate will ensue. Oil production in the south will probably continue.”

Saudi Arabia

Saudi Arabia will respond to any shortage and can sustain output at 12.5 million barrels a day for as long as required, a Saudi official, who declined to be identified, said. The kingdom produced 9.7 million last month, according to Bloomberg data.

“The Saudi statement is designed to keep prices in check,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “This should be a limiting factor for any rallies.”

OPEC pledged to pump as much oil as the world needs to replace any barrels lost from the escalating violence in Iraq that drove prices to a nine-month high, Secretary-General Abdalla El-Badri said after talks with EU Energy Commissioner Guenther Oettinger in Brussels.

Ukraine Tension

Pro-Russian rebels in Ukraine shot down a government helicopter in violation of a cease-fire just hours after President Vladimir Putin met a key European Union demand to help end fighting.

Putin asked lawmakers in the upper house of parliament to rescind approval they granted to use force in Ukraine on March 1. WTI rose to a five-month high on March 3 as Russia seized Ukraine’s Crimea peninsula. Ukraine is a major transit route for Russian oil and natural gas going to Europe.

“The situations in Iraq and Ukraine continue to support the market,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We are going to continue to trade near nine-month highs as long as fears about Iraqi supply remain.”

U.S. crude supplies probably fell by 1.7 million barrels last week, according to the median estimate of eight analysts in a Bloomberg survey before an Energy Information Administration report tomorrow. Stockpiles reached 399.4 million in April, the highest since the Energy Department’s statistical arm started publishing weekly data in 1982.

Gasoline Inventories

“Expectations that tomorrow’s report will show an inventory decline are mildly supportive for the market,” Kilduff said.

Inventories of gasoline probably grew by 1.45 million barrels, according to the survey. Stockpiles of distillate fuel, a category that includes heating oil and diesel, increased by 850,000 barrels.

Gasoline futures for July delivery rose 1.82 cents, or 0.6 percent, to settle at $3.1258 a gallon on the Nymex. Ultra-low sulfur diesel for July delivery advanced 0.9 cent, or 0.3 percent, to $3.0416.

--With assistance from Wael Mahdi in Manama and Grant Smith in London.