WTI, Brent Pare Gains as Iraq Unrest Seen Sparing Crude Supplies

West Texas Intermediate and Brent trimmed earlier gains amid speculation that oil production in Iraq, OPEC’s second-largest producer, would remain unaffected by escalating violence.

WTI futures pared a gain of 0.6 percent in New York. Iraq’s military struck the positions of insurgents who have captured territory north of Baghdad, trying to turn back battlefield advances that threaten to split the country. The complete halt of Iraqi output, concentrated at the opposite end of the country, is “highly unlikely,” according to Bank of America Corp.

“We do not expect material disruption to oil exports,” Adam Longson, an analyst at Morgan Stanley in New York, said in a report today. “Without an outage, market fatigue will likely lower the geopolitical premium in the coming months and allow fundamentals to drive pricing again.”

WTI for July delivery was 21 cents higher at $107.12 a barrel in electronic trading on the New York Mercantile Exchange as of 12:29 p.m. London time. It earlier rose as much as 63 cents to $107.54 a barrel. The contract climbed 0.4 percent to $106.91 on June 13, the highest close since Sept. 18. The volume of all futures traded was 62 percent higher than the 100-day average for the time of day. Prices are up 8.8 percent this year.

Brent for August settlement traded 23 cents higher at $112.69 a barrel, paring an earlier gain of 82 cents, or 0.7 percent, on the London-based ICE Futures Europe exchange. The July contract expired June 13 after climbing 0.3 percent to $113.41. The European benchmark crude traded at a premium of $6.31 to WTI on ICE.

Iraq Fighting

Prime Minister Nouri al-Maliki’s Shiite Muslim-led government is seeking to reassert control over territory held by the breakaway al-Qaeda group, whose advances put in doubt his rule over a unified Iraq. The army killed more than 279 fighters from the Islamic State in Iraq and the Levant, known as ISIL, military spokesman Qassim Ata said in a televised news conference yesterday.

The country produced 3.3 million barrels a day last month, data from Bloomberg show. Brent may quickly rally to a range of $120 to $125 a barrel if production is affected, Societe Generale SA said.

The Organization of Petroleum Exporting Countries is monitoring the situation in Iraq and will maintain its production limit of 30 million barrels a day for now, Secretary-General Abdalla El-Badri said at the World Petroleum Congress in Moscow.

Serious Threat

The U.S. State Department said it was keeping its embassy in Baghdad open while reviewing staffing requirements. Some additional U.S. government security personnel will be added, while some staff members will be temporarily relocated to consulates elsewhere in Iraq and to the Iraq support unit in Amman, Jordan, spokeswoman Jen Psaki said in a statement.

“The real concern is a disruption to production and exports in southern Iraq,” Mike Wittner, head of oil market research at Societe Generale SA in New York, said in a report. “The threat of that happening is not imminent, but it is serious.”

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration estimates is home to three-quarters of Iraq’s crude output. The country’s 2.58 million barrels a day of exports in May were all shipped from the south while northern shipments via the Kirkuk-Ceyhan pipeline have been halted since March 2, Asim Jihad, oil ministry spokesman, said June 1.

“Iraqi oil exports are still flowing and immediate risks to production seem limited,” Francisco Blanch, head of commodities research at Bank of America in New York, said in a report.

Baiji Refinery

ISIL has control of the pipeline to the 310,000 barrel-a-day Baiji refinery, the country’s biggest. The insurgents also took Mosul, the country’s second-largest city. Kurdish forces moved into Kirkuk to protect the northern oil fields from the militants. The main pipeline from that field to Turkey hasn’t operated since early March because of attacks.

The U.S. has dispatched an aircraft carrier to the Persian Gulf as President Barack Obama weighs options to help Maliki repel ISIL attacks. The U.S. withdrew its forces from Iraq in 2011. Obama said on June 13 that the conflict can’t be resolved unless Iraq’s leaders bridge political differences.

“Iraq is the key driver,” said Ric Spooner, a chief strategist at CMC Markets in Sydney, who predicts investors may sell WTI contracts if prices rise to about $110.50 a barrel. “This is a situation that is very uncertain. The speed with which the insurgents have made incursions into Iraq shows how brittle things are in the country.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net James Herron, Rachel Graham

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