Oil Surges in N.Y. on Mideast Unrest, Shrinks Discount to Brent

Oil surged the most this month amid mounting Middle East tensions, narrowing a record spread between U.S.-traded West Texas Intermediate and Brent in London.

Crude oil in New York rose 1.6 percent after protesters clashed with police in Bahrain, Yemen and Libya, and Iranian state-run television said the country was sending two warships through the Suez Canal. Brent slipped from a two-year high as traders moved money into the U.S. contract.

“The spread between Brent and WTI is coming in,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “There’s some catch-up for WTI when it comes to the geopolitical situation taking place.”

Crude for March delivery rose $1.37 to settle at $86.36 a barrel on the New York Mercantile Exchange, the biggest one-day increase since Jan. 31. Futures have gained 12 percent in the past year. April crude on the Nymex gained $1, or 1.1 percent, to $88.84. The March contract in New York expires on Feb. 22.

Brent crude for April settlement fell $1.19, or 1.1 percent, to $102.59 a barrel on the ICE Futures Europe exchange in London. The contract increased to $103.78 yesterday, the highest settlement since Sept. 25, 2008.

The difference between the April contracts in London and New York was at $13.75 a barrel, compared with $15.94 yesterday. The spread had widened amid a glut of oil at Cushing, Oklahoma, the delivery point for the New York-traded contract.

Brent prices tumbled 1.3 percent and New York futures jumped 1 percent in the two hours before floor trading closed on the Nymex.

Trade Flows

“We’ve seen an extraordinarily wide spread between Brent and WTI in 2011, and today we’re seeing a correction,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “This is all about trade flows. After the action takes place, we go searching for a reason, when what we’re looking at is money sloshing around.”

Brent was $1.06 a barrel cheaper than Nymex crude a year ago, and the differential averaged 76 cents last year. The European crude has typically traded at a discount to WTI.

Oil supplies at Cushing jumped to a record 38.3 million barrels in the week ended Jan. 28, pressuring the price of WTI on the Nymex. Cushing inventories gained 250,000 barrels to 37.7 million in the seven days to Feb. 11, according to an Energy Department report yesterday. That’s 23 percent higher than year- earlier levels.

“Nymex is such a false market right now,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “We’ve taken out the lows from the early part of the year and are back into an area of congestion between $80 and $85. The market’s going to look at that as a buying opportunity, especially with Brent comfortably over $100.”

Bahrain Unrest

The army deployed in Bahrain’s capital, Manama, following the deaths of five people in overnight conflicts, and pro- democracy demonstrations stretched into a third day. Protesters also clashed with police in Yemen and Libya, the eighth-biggest oil producer in the Organization of Petroleum Exporting Countries.

The Press TV report on the Iranian warships raised concern about a possible confrontation between Israel and Iran which could curb Middle Eastern oil supplies after Israeli Foreign Minister Avigdor Lieberman said yesterday that plans to send the ships through the canal to Syria were a “provocation.”

“Until now, we don’t have any information or a license from any ministry in Egypt,” Ahmed El Manakhly, the canal authority’s head of traffic, said in a phone interview after the Iranian TV report. Egypt’s Defense Ministry must approve any vessel’s use of the canal, he said earlier.

Suez Canal

About 2.5 percent of global oil output moves through Egypt via the Suez Canal and the adjacent Suez-Mediterranean pipeline, according to Goldman Sachs Group Inc. Iran is OPEC’s second- largest oil producer after Saudi Arabia, pumping 3.72 million barrels a day last month, according to Bloomberg News estimates.

Countries in the Middle East and North Africa were responsible for 36 percent of global oil production and held 61 percent of proved reserves in 2009, according to BP Plc, which publishes its BP Statistical Review of World Energy each June.

“We can’t dismiss the fact that there’s a lot going on in the Middle East, whether it’s Iran, Bahrain or Libya,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “Nobody can really say whether it’s going to be good or bad for us. With a long weekend ahead, it’s better to be safe than sorry.”

U.S. financial markets will be closed Feb. 21 for the Presidents Day holiday.

Oil volume in electronic trading on the Nymex was 905,165 contracts as of 3:22 p.m. in New York. Volume totaled 942,065 contracts yesterday, 28 percent above the average of the past three months. Open interest was 1.54 million contracts.

To contact the reporters on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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