WTI rises to eight-month high on escalating Iraq conflict

6/12/2014

WTI rises to eight-month high on escalating Iraq conflict

MARK SHENK

NEW YORK (Bloomberg) -- West Texas Intermediate rose to an eight-month high and Brent surged as violence escalated across northern and central Iraq, increasing the prospect of a return to civil war in OPEC’s second-biggest oil producer.

WTI advanced as much as 2% while Brent gained 2.2%. Militants linked to al-Qaeda extended control over Iraq’s second-biggest city and moved south toward Baghdad. U.S. planes may bomb northern Iraq, Oil Minister Abdul Kareem al-Luaibi said today, June 12, in Vienna. Iraqi crude production rose 50,000 bpd to 3.3 million last month, Bloomberg data show.

“This is a major geopolitical event for the oil market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Iraq had been a bright spot ramping up production and now we’re in the midst of a very ugly conflict. Most of the production is in the south but if the rebel advance continues this could be threatened.”

WTI for July delivery climbed $1.63, or 1.6%, to $106.03 a barrel at 10:33 a.m. on the New York Mercantile Exchange. Futures touched $106.53, the highest intraday level since Sept. 19. The volume of all futures traded was more than double the 100-day average. Prices are up 7.7% this year.

Brent for July settlement rose $2.05, or 1.9%, to $112 a barrel on the London-based ICE Futures Europe exchange. The contract reached $112.34, the highest since March 3. Volumes were almost triple the 100-day average. Brent traded at a $5.97 premium to WTI, up from $5.55 at yesterday’s close.

Mosul

The European benchmark, 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.

Militants seized the city of Mosul in northern Iraq yesterday, June 11, and have halted repairs to the nation’s main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. They advanced on Tikrit and there were conflicting reports about whether the 310,000 bpd Baiji refinery had been captured.

The fighting hasn’t extended to the southern part of the country, where the U.S. Energy Information Administration estimates about three-fourths of Iraq’s crude production comes from. Oil is being exported from the south and the country shipped 5.43 MMbbl of crude from Basrah yesterday, according to the oil minister.

‘Instability Fears’

“The market is moving on regional instability fears,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd. in London. “Production has yet to be seriously affected by the upsurge in violence.”

Iraq’s military, backed by air power, attacked fighters of the Islamic State in Iraq and the Levant in Saddam Hussein’s former hometown of Tikrit, about 80 miles (130 km) north of Baghdad, state-sponsored Iraqiya television reported today. Prime Minister Nouri al-Maliki is rallying Shiite militias to defend his government.

ISIL is among the mostly Sunni groups fighting to topple Syria’s President Bashar al-Assad. It established semi-permanent encampments in desert areas of western Iraq, especially in Anbar and Nineveh provinces, to provide secure bases for its fighters in Syria, the U.S. State Department said in an April report.

“Syria’s war has been going on for years and has now moved into northern Iraq,” Sen said. “There are huge implications for the region as Sunni-Shia conflict grows. Iran, the major Shia power, is right next door and Sunni Saudi Arabia borders Iraq as well.”

OPEC Target

The Organization of Petroleum Exporting Countries at a meeting in Vienna yesterday kept its daily production target unchanged at 30 MMbbl, leaving output below demand projected for this year. Ministers said that they were at ease with supply and demand in global oil markets.

While the formal limit remains unchanged, the burden will fall to Saudi Arabia to boost output to meet higher demand in the second half of 2014 as turmoil constrains supply, according to Barclays Plc, Societe Generale SA and Energy Aspects.

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