Oil Prices Jump as Attack on Convoy Boosts Ukraine Fears

Brent and West Texas Intermediate crudes advanced after Ukraine said its forces attacked and partially destroyed a convoy entering the country from Russia.

Ukrainian troops engaged the vehicles that had arrived overnight through a rebel-held section of the border, Andriy Lysenko, a spokesman for the country’s military, told reporters in Kiev today. Brent dropped to the lowest level since June 2013 yesterday while WTI settled at a six-month low amid signs of weaker demand and ample global oil supplies.

“When there’s the prospect of ground war in Europe you don’t want to be short oil,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.6 billion, said by phone. “Prices have already fallen a lot and the market was ready for a rebound.”

Brent for October settlement climbed $1.46, or 1.4 percent, to $103.53 a barrel on the London-based ICE Futures Europe exchange. It was the biggest gain since July 17. October futures fell 2 percent this week. The September contract expired at $102.01 yesterday, the lowest close for a front-month contract since June 26, 2013.

WTI for September delivery rose $1.77, or 1.9 percent, to settle at $97.35 a barrel on the New York Mercantile Exchange. It was also the biggest gain since July 17. The contract dropped to $95.58 yesterday, the lowest settlement since Jan. 21. Futures dropped 0.3 percent this week.

The European benchmark crude closed at an $8.21 premium to the October WTI contract.

Alleged Support

Ukraine has said for months that separatist rebels in its easternmost regions are receiving support from Russia, which backs them with artillery fire. Russia has denied involvement in the Ukrainian unrest. The Foreign Ministry in Moscow said it was concerned about potential attempts to disrupt a humanitarian convoy and repeated a call for a cease-fire to allow for aid delivery.

“New violence in eastern Ukraine providing a little strength to the upside,” Michael Cohen, an analyst at Barclays Plc in New York, said by phone. “There’s risk to the upside looking ahead because of both supply and demand.”

Futures surged in March when Ukraine mobilized its army reserves in response to Russia, the world’s biggest energy exporter, seizing the Black Sea region of Crimea.

The 14-day relative strength index for WTI ended trading at 28.0161 yesterday, according to data compiled by Bloomberg. Investors typically start buying contracts when the reading is below 30, a sign a market is oversold.

“The market is oversold so a bit of buying is to be expected,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “The wild card going into the weekend is the tension between Russia and Ukraine.”

Economic Growth

Prices also rose after data showed that U.S. factory production increased in July at the fastest pace in five months. The 1 percent gain at manufacturers followed a 0.3 percent increase in the prior month that was more than initially estimated, figures from the Federal Reserve in Washington showed today. Wholesale prices in the U.S. rose at a slower pace as fuel costs dropped by the most in eight months.

“The factory production numbers and the wholesale price data were both pretty good,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. “They point to sustained growth and low inflation.”

Gasoline for September delivery increased 3.2 cents, or 1.2 percent, to settle at $2.6986 a gallon on the Nymex. Futures tumbled 3.2 percent to $2.6666 yesterday, the lowest close since Feb. 5.

Pump Prices

Pump prices fell 0.3 cent to $3.468 a gallon nationwide yesterday, the lowest since March 4, according to AAA, the largest U.S. motoring group.

Ultra low sulfur diesel for September delivery rose 2.85 cents, or 1 percent, to settle at $2.848 a gallon. It closed at $2.8195 yesterday, the lowest settlement since May 31, 2013.

Oil fell earlier on speculation that Iraqi Prime Minister Nouri al-Maliki’s agreement to leave office yesterday may pave the way for the formation of a less divisive government. Kurdish forces are fighting to retake positions overrun by Islamic State fighters in the northern part of the country. Iraq was the second-biggest crude producer in the Organization of Petroleum Exporting Countries last month, according to a Bloomberg survey.

Crude Supplies

U.S. crude supplies rose 1.4 million barrels to 367 million last week, the first gain since June, Energy Information Administration data showed Aug. 13. Refineries operated at 91.6 percent of their capacity last week, the third straight decline, according to the EIA. U.S. refiners usually schedule maintenance for September and October when gasoline demand slips.

“Prices might be up today but the outlook remains pretty bearish,” Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania, said by phone. “Supplies are plentiful and refinery demand will be dropping off further. We’ve broken through key resistance recently and the next target will be the year-to-date low of $91.24.”

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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