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Oil climbs to five-week high as Ukraine-Russia tension escalates

MARK SHENK

(Bloomberg) -- Brent and West Texas Intermediate crudes rose to five-week highs as tension escalated between Ukraine and Russia, the world’s biggest energy exporter.Brent’s premium to WTI widened for the first time in seven days.

Futures advanced 1.6% in London and 0.3% in New York. Russia called for an emergency meeting of the United Nations Security Council after Ukrainian security forces clashed with pro-Russian gunmen in the eastern town of Slovyansk. European officials weighed expanding sanctions against Russia over Ukraine, where they say the government in Moscow is stoking separatist unrest with the same methods it used to destabilize and annex Crimea.

“The situation in Ukraine deteriorated significantly over the weekend, which explains the strength in Brent,” said Bob Yawger, Director of the Futures Division at Mizuho Securities USA in New York. “The upsurge in unrest justifies trading at these levels.”

Brent for May settlement increased $1.74 to $109.07 a bbl on the London-based ICE Futures Europe. It was the highest close since March 4. The volume of all futures traded was 27% higher than the 100-day average. Brent’s May contract expires 15 April, 2014. The June contract also closed at $109.07, up $1.67 for the day.

WTI for May delivery gained 31 cents to $104.05 a bbl on the New York Mercantile Exchange. It was the highest settlement since March 3. Volume was 18% above the 100-day average.

The U.S. benchmark grade closed at a $5.02 discount to Brent. The spread shrank to $3.28 on an intraday basis on April 11, the least since September 20.

In Ukraine, camouflaged gunmen fired on government forces near Slovyansk, 240 km from the Russian frontier, Ukrainian Interior Minister Arsen Avakov said. “Henchmen” of the government in Kiev are organizing attacks with the backing of Western nations, Russia’s Ambassador to the UN Vitaly Churkin said at an emergency session of the Security Council in New York.

“There do have to be consequences to a further and further escalation by Russia,” U.K. Foreign Secretary William Hague told reporters before meeting with European Union foreign ministers in Luxembourg. “I will be arguing today that further sanctions have to be the response to Russia’s behavior.”

A halt of Russian crude and natural gas supplies through Ukraine “could be hugely impactful,” according to Ed Morse, the head of commodities research at Citigroup. Any sanctions on Russia’s energy industry would cause prices to “spike much higher,” he said in a report.

The potential return of Libyan barrels helped offset concern about a reduction in Russian supply. The country’s state-run National Oil lifted force majeure on the Hariga terminal on April 10. The harbor is one of four seized last year by rebels seeking self-rule in the east of the country.

“Any threat to Russian supplies is being offset somewhat by the prospect of increased shipments from Libya,” said Addison Armstrong, Director of Market Research at Tradition Energy in Stamford, Connecticut.“It’s also important to remember that there’s a lot of spare OPEC production capacity out there, so Brent is looking a little toppy.”

Output from the Organization of Petroleum Exporting Countries fell in March for the fifth time in seven months, according to a Bloomberg survey. Saudi Arabia has 2.75 MMbpd of spare crude production capacity, according to the survey of companies, producers and analysts.

WTI entered a bullish technical formation known as a “golden cross” on April 11, according to data compiled by Bloomberg. The 50-day moving average, at about $100.84 a bbl on April 14, 2014, settled at a premium of 8 cents to the 200-day mean. Investors typically buy contracts when a moving average climbs above a longer-term one.

“WTI formed a golden cross on Friday, which should give it some strength,” Armstrong said. “We could soon test $105.22.”

Oil in New York touched $105.22 on March 3, the highest intraday level since September 20, as Russia forces seized Crimea.

Hedge funds and other money managers boosted net-long positions on WTI by 10% to 331,056 futures and options in the week ended April 8, according to the U.S. Commodity Futures Trading Commission. Bets on rising prices were at the highest level for this time of year since at least 2006, according to data from the Washington-based regulator.

Implied volatility for at-the-money WTI options expiring in June was 16.9%, up from 16.5% April 11, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 516,478 contracts. It totaled 644,537 contracts April 11, 19% above the three-month average. Open interest was 1.69 mn contracts.

04/15/2014

 

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