Brent Adds to Premium Over WTI as Libyan Production Falls

Brent crude rose the most in two weeks as Libyan output fell, widening the premium to West Texas Intermediate. Futures also gained on speculation that the U.S. Federal Reserve will maintain the pace of stimulus.

Brent oil traded in London surged 2.5 percent after state-run National Oil Corp. said crude production in Libya declined to 250,000 barrels a day because of labor protests. WTI in New York advanced 0.9 percent a day before the Federal Open Market Committee starts a two-day meeting at which it is likely to delay reducing, or “tapering,” monthly bond purchases until March, according to a Bloomberg survey of economists.

“The Libyan production drop is the main driver and is also the reason why Brent is stronger,” said Jacob Correll, a Louisville, Kentucky-based commodity analyst at energy management firm Schneider Electric Professional Services. “There’s a growing belief that the Fed will agree to keep the full-bore bond buying program. The outlook for tapering anytime soon is fading.”

Brent for December settlement rose $2.68 to end the session at $109.61 a barrel on the London-based ICE Futures Europe exchange. Volume was 13 percent higher than the 100-day average. The European benchmark crude closed at a $10.93 premium to WTI, up from $9.08 on Oct. 25. The intraday spread reached $13.37 on Oct. 23, the most in six months.

WTI for December delivery gained 83 cents to settle at $98.68 a barrel on the New York Mercantile Exchange. Futures touched $95.95 on Oct. 24, the lowest intraday level since June 27. The volume of all futures traded was 26 percent below the 100-day average.

Brent Impact

North Sea-produced Brent, the benchmark for half the world’s oil, is more sensitive to changes in Middle Eastern and North African output (IPMGCHNG) than WTI because Europe depends more on shipments from the regions. WTI price gains are limited because of ample U.S. crude stockpiles.

“Brent is getting a lift from Libya,” said Bill O’Grady, the chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion of assets. “The FOMC will probably have a doughnut-and-coffee meeting with no changes announced.”

Production at Libya’s Sharara oil field fell almost 50 percent from approximately 300,000 barrels a day because of a stoppage yesterday, Mohamed Elharari, a spokesman for the state-run National Oil Corp., said by telephone from Tripoli. Libya was pumping 600,000 barrels a day, Mustapha Sanalla, board member of the National Oil Corp., said Oct. 22.

Libyan Production

Libyan output tumbled 275,000 barrels to 300,000 barrels a day in September, a Bloomberg survey of oil companies, producers and analysts showed. It was the sixth straight decrease sent production to the lowest level since September 2011. Two years after the war that deposed Muammar Qaddafi, efforts to revive output are being stymied by feuding militias and protests.

Iraq’s crude exports last month dropped to 62.1 million barrels, or 2.07 million barrels a day, in September amid maintenance work, Asim Jihad, an oil ministry spokesman, said in an e-mail yesterday.

A series of car bombs in Shiite areas of Baghdad yesterday killed at least 39 people and wounded dozens of others, the Associated Press said, citing police and health officials.

Iraqi Violence

“There seems to be some questions about Libya’s production and there’s also been a lot of violence in Iraq,” said Phil Flynn, a senior market analyst for Price Futures Group in Chicago. “The combination of those two factors really seems to put the risk premium back into the Brent price.”

Weaker-than-forecast U.S. factory production data added to speculation the Fed will delay scaling back its $85 billion a month of bond purchases. Output rose 0.1 percent, figures from the Fed showed today in Washington. The median forecast of economists surveyed by Bloomberg called for a 0.3 percent gain.

“The factory numbers weren’t impressive but the market actually bounced a bit,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “We’re in a bizarre world where disappointing economic data can be positive for the markets because of what it may mean for Fed tapering.”

U.S. Inventories

WTI fell the past three weeks because of rising U.S. crude supplies and falling demand from refineries undergoing seasonal maintenance. Stockpiles gained 6.8 percent to 379.8 million barrels in the five weeks ended Oct. 18, according to data from the Energy Information Administration. Refineries operated at 85.9 percent of capacity in the week ended Oct. 18, the lowest level in almost six months, the EIA said Oct. 23.

“The WTI-Brent spread is widening again,” O’Grady said. “The wider it gets, the greater the incentive for refineries here to speed up maintenance and get back on line.”

Implied volatility for at-the-money WTI options expiring in December was 19.5 percent, up from 18.9 percent Oct. 25, according to data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 399,646 contracts as of 2:52 p.m. It totaled 390,150 contracts Oct. 25, 33 percent lower than the three-month average. Open interest was 1.78 million contracts.

To contact the reporter on this story: 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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