Oil Prices Cap First Weekly Gain in a Month on Ukraine Conflict

Jul 18, 2014 3:38 pm ET

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

July 18 (Bloomberg) -- West Texas Intermediate crude capped its first weekly gain in a month after a Malaysia Airlines passenger jet was downed in Ukraine and Israel sent ground forces into the Gaza Strip.

WTI has climbed 3.2 percent since July 15, when it dropped below $100 for the first time in two months. The Boeing Co. 777 crashed in the main battleground of Ukraine’s civil war, threatening to escalate the worst crisis between the West and Russia since the end of the Cold War. Israel’s movement of troops and tanks into Gaza marks the first significant ground operation in the coastal enclave since 2009.

“The geopolitical threat was discounted too quickly and has rapidly been priced back in,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The events in eastern Ukraine and in the Middle East are a reminder of the fragility of the world’s biggest oil-exporting regions.”

WTI for August delivery dropped 6 cents to settle at $103.13 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 47 percent above the 100-day average for the time of day. Futures climbed 2.3 percent this week and are up 4.8 percent this year.

Brent for September settlement slipped 65 cents, or 0.6 percent, to end the session at $107.24 a barrel on the London- based ICE Futures Europe exchange. The September contract slipped 2 cents this week. The European benchmark crude closed at a $5.29 premium to the September WTI contract.

‘Slight Selloff’

“There was such a strong recovery yesterday that a slight selloff is to be expected,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion, said by phone. “We’re now in a wait-and-see situation. I don’t think anyone’s going to be wildly bearish, though, given the unsettled situation.”

WTI advanced 2.3 percent on March 3 after Ukraine mobilized its army reserves in response to Russia, the world’s biggest energy exporter, seizing the Black Sea region of Crimea. The U.S. and European Union this week imposed sanctions on Russian banks and energy and defense firms in the latest attempt to punish the country over Ukraine. OAO Rosneft, Russia’s largest oil company, and natural gas producer OAO Novatek are among those covered by the penalties.

President Barack Obama said the missile that downed the plane was fired from an area in Ukraine controlled by Russian- backed separatists. Obama said at least one American was killed and called for an immediate cease-fire in comments made at the White House.

Missile Strike

Ukraine’s state security service said it intercepted phone conversations among militants discussing the missile strike, which knocked Flight 17 from the sky about 50 kilometers (31 miles) from the Russian border.

Israel sent soldiers and tanks into Gaza in a ground offensive aimed at stopping the barrage of missiles fired by Hamas and other Palestinian militants after a brief cease-fire collapsed earlier in the day.

“The drop below $100 was very short-lived,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone. “The events of the last 24 hours have shown that the removal of the geopolitical premium was premature. The events in Gaza and the downed plane have the potential to deepen already dangerous situations.”

Falling Supplies

The rally began on July 16 when the Energy Information Administration reported that U.S. crude supplies dropped by 7.53 million barrels to 375 million last week. Refineries operated at 93.8 percent of capacity, the highest level since August 2005, said the EIA, the Energy Department’s statistical unit.

Gasoline for August delivery dropped 2.14 cents, or 0.7 percent, to settle at $2.8603 a gallon on the Nymex. It was the lowest close since Feb. 28.

U.S. gasoline pump prices dropped 0.2 cent to $3.588 a gallon nationwide yesterday, the lowest since April 7, according to AAA, the largest U.S. motoring group.

Ultra low sulfur diesel for August delivery declined 1.4 cents, or 0.5 percent, to close at $2.8452 a gallon. It was the lowest settlement since Nov. 7.