Oil Rebounds From Six-Month Low on Middle East Tension

02:38 PM @ Tuesday - 05 August, 2014
West Texas Intermediate crude rebounded from a six-month low on rising tension in Iraq and speculation that last week’s 4.1 percent drop was excessive. Brent widened its premium to WTI.

Militants from Islamic State, a breakaway al-Qaeda group, have taken control of two oil fields and some predominantly Kurdish towns in northern Iraq, according to an Aug. 2 statement by the state-run Northern Oil Co. Oil’s gain accelerated as U.S. stocks rebounded from the biggest weekly loss in two years.

“Last week’s move down is enough for the market already,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “There is no reason for oil to go lower than it already is. As long as stock markets are stable and going higher, people can concentrate on commodities. Brent is strengthening out of concern over the Middle East.”

WTI for September delivery gained 41 cents, or 0.4 percent, to settle at $98.29 a barrel on the New York Mercantile Exchange. The volume of all futures was 26 percent below the 100-day average. Prices slid to $97.88 on Aug. 1, the lowest close since Feb. 6.

The 14-day relative strength index of front-month futures reached 31.5 after falling below 30 in the previous two days, according to data compiled by Bloomberg. An RSI below 30 typically signals a market is oversold. The September WTI contract fell to near the 200-day moving average of $97.05 on Aug. 1.

Oversold Situation

“We are definitely in an oversold situation,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “There is strong support down around $97. There is increasing concern about Iraq.”

Brent for September settlement increased 57 cents, or 0.5 percent, to $105.41 a barrel on the London-based ICE Futures Europe exchange. It declined to $104.84 on Aug. 1, the lowest settlement since April 2. Volume was 11 percent above the 100-day average. The European benchmark crude was at a premium of $7.12 to WTI, compared with $6.96 on Aug. 1.

The Ain Zala and Batma oil fields, which together have an output of 30,000 barrels per day, are under full control of the group, according the state-run Northern Oil. The Sunni Islamist militants last month occupied the Qayyara oil field north of Baghdad.

Geopolitical Risk

“Last week’s drop is probably a bit too much,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “There is still geopolitical risk out there.”

The Kurdistan Democratic Party said it recaptured two border towns of Sinjar and Rabia’ah near Syria today.

Islamic State, which was previously known as Islamic State in Iraq and the Levant, has seized territory in northern and western Iraq, taking over oil wells and fighting for control of refineries. The fighting hasn’t spread to southern Iraq, home to about three-quarters of the nation’s oil output.

“We had significant declines in prices last week,” said Andy Lipow, president of Lipow Oil Associates LLC, an energy consulting firm in Houston. “The market is showing concern over rising violence in the Middle East.”

The Standard & Poor’s 500 Index (BCOM) advanced as much as 0.7 percent after dropping 2.7 percent last week. The Bloomberg Commodity Index climbed for the first time in five days, up 0.7 percent to 127.91. It fell to 127.09 on Aug. 1, the lowest since February.

Crude dropped last week as CVR Energy Inc. (CVI) shut the Coffeyville refinery in Kansas after a fire July 29, reducing purchases from Cushing, Oklahoma, the delivery point for New York futures.

Gasoline for September delivery slid 0.7 percent to $2.7249 a gallon on the Nymex, the lowest settlement level since February. The gasoline crack spread, a rough measure of the profit from processing a barrel of oil into gasoline, narrowed to $16.16 a barrel, the lowest based on settlement prices since July 24.
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