Oil geopolitical-risk rally fades as Iraq works to revive fields

By Meenal Vamburkar and Sharon Cho on 10/20/2017

NEW YORK and SINGAPORE (Bloomberg) -- A surge in crude prices faded as Iraq sought to restore flows from fields in a disputed region after violence had curbed output in OPEC’s second-biggest producer.

Futures fell as much as 1.2% in New York, further eroding the gains from last Friday through Wednesday as tensions flared in the Kirkuk province. Engineers were said to be working to replace equipment missing from fields in the region that Iraqi government troops recaptured this week from Kurdish forces. U.S. government data published Wednesday has deepened the slide, showing gasoline stockpiles rose for a fourth week while distillates expanded for the first time since August.

While oil investors are grappling with geopolitical risks, the potential impact of tensions in the Middle East is uncertain, Goldman Sachs Group Inc. said Tuesday. While the conflict between Iraq’s central government and the semi-autonomous Kurds cut crude flows through a Turkish pipeline, the disruption may be short lived. Meanwhile, OPEC sent its strongest signal yet that its output cuts will be extended until the end of 2018.

"The swiftness with which the Iraqi central government consolidated power again in Kirkuk relieves any fears that production from Iraq would be impacted," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy.

WTI crude for November delivery, which expires Friday, was down 22 cents at $51.07/bbl on the New York Mercantile Exchange at 9:19 a.m. in New York. Total volume was about 11% below the 100-day average. The more-actively traded December contract dropped 15 cents to $51.36.

Brent for December settlement fell 9 cents, or 0.2%, to $57.14/bbl on the London-based ICE Futures Europe exchange. The contract slumped 1.6% to $57.23 on Thursday, after climbing to a three-week high in the previous session. The global benchmark crude traded at a premium of $5.82 to December West Texas Intermediate.

"There is just a feeling out there that we can manage this geopolitical risk, and it’s all going to be fine," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. 

Export stoppage

The flow rate through the pipeline from the Kurdish region to the Turkish port of Ceyhan was about 200,000 bpd, according to a port agent report. That was unchanged from Thursday, but down from about 600,000 bpd before the conflict began.

Negotiations to prepare for OPEC’s Nov. 30 meeting are taking their lead from Russian President Vladimir Putin’s tentative backing for a further nine months of curbs, the group’s Secretary-General Mohammad Barkindo said at the Oil & Money conference in London on Thursday. The comments signal not only the growing chance of an extension of the cuts, but also how far Russia and Saudi Arabia are working together to lift oil prices.

U.S. gasoline inventories expanded by 908,000 bbl last week, while distillate supplies climbed by 528,000 bbl to 134.5 MMbbl, according to the Energy Information Administration. Crude stockpiles declined for a fourth week, down by 5.731 MMbbl to 456.5 MMbbl, the data showed.

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