WTI Advances for Second Day, Narrowing Discount to Brent

Brent and West Texas Intermediate crudes capped a second weekly gain as the U.S. said it will send military advisers to Iraq to help repel militants in OPEC’s second-biggest oil producer.

The European grade rose 1.2 percent this week while WTI advanced 0.3 percent. Brent reached a nine-month high yesterday as President Barack Obama said he’s sending as many as 300 troops to help the Iraq battle an insurgency and the U.S. may take more “targeted” action. Ukraine announced a week-long unilateral cease-fire in eastern regions bordering Russia. WTI settled at a nine-month high today as a U.S. pipeline reopened.

“We’re building a geopolitical risk premium into the prices,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Prices are $10 to $15 a barrel higher than they would be if it weren’t for the situation in Iraq and trouble in Ukraine.”

Brent for August settlement slipped 25 cents to close at $114.81 a barrel on the London-based ICE Futures Europe exchange. It climbed to $115.06 yesterday, the highest close since Sept. 6. The volume of all futures traded was 2.9 percent above the 100-day average at 2:55 p.m. in New York.

WTI for July delivery, which expired today, advanced 83 cents, or 0.8 percent, to $107.26 a barrel on the New York Mercantile Exchange. It was the highest settlement since Sept. 18. The more-active August contract rose 78 cents to $106.83. The volume of all futures traded was 4.4 percent lower than the 100-day average.

Spread Narrows

Brent’s premium to WTI slipped for the first time in five days. The European oil benchmark closed at a $7.98 discount to August WTI, down from $9.01 yesterday, which was the most since March 14.

WTI also rose as Enterprise Products Partners LP (EPD) said it reopened the Seaway pipeline that carries crude from Cushing, Oklahoma, to refineries along the U.S. Gulf Coast. Cushing is the delivery point for WTI traded in New York.

“Nobody has an idea of what will take place in Iraq between now and when we come back in on Monday,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The spread has widened to almost $10, so the least risky thing may be to go long WTI.”

The U.S. advisers are intended to help repel a Sunni insurgency in Iraq for at least several weeks and give the country’s Shiite leaders time to form a new government that can command support across sectarian lines.

Seized Cities

Insurgents led by the Islamic State in Iraq and the Levant, or ISIL, have seized cities north of Baghdad and engaged in a back-and-forth battle to control the Baiji refinery, the country’s largest.

“Prices will plummet next week if the Shiite militias and government forces are able to push back the militants, but that’s unlikely,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. “We will probably come in next week with no sign of resolution soon.”

Iraqi crude production rose 50,000 barrels a day to 3.3 million in May, according to a Bloomberg survey. It was the biggest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia.

“The trend is still clear, as long as there’s the threat of a loss of Iraqi crude you have to favor Brent,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “We’ve had a tremendous move in Brent this week and there’ve been heavy bets on the spread. It would make sense for the spread to come in.”

Halt Offensive

Ukraine called on all fighters to lay down arms, halting the government offensive against rebels until June 27, the Interior Ministry in Kiev said in a website statement, citing President Petro Poroshenko. The U.S. imposed sanctions on people linked to the insurgency and accused Russia of providing new military aid to separatists.

Brent climbed more than WTI for a second week. The European crude, which is used to price more than half of the world’s oil, is typically more sensitive to changes to the global supply-and-demand balance. It gained more than $2 in the three days before today.

“We’re seeing some rotation between the two major benchmarks,” Evans said. “You have to still favor buying Brent as opposed to WTI on the whole, because it’s more directionally supported by the uncertainty about Iraq.”

Gasoline futures for July delivery rose 0.22 cent to $3.1277 a gallon on the Nymex, the highest settlement since July 16. Ultra-low sulfur diesel for July delivery dipped 0.12 cent to close at $3.0512.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Stephen Cunningham

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