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Crude Tumbles as Syria Proposal Eases Supply Concerns

West Texas Intermediate crude fell the most in three weeks as Syria agreed to a Russian plan to surrender its chemical weapons, easing concern that the conflict will escalate and disrupt oil shipments from the Middle East.

Futures tumbled 1.9 percent as France said it will submit a proposal to the United Nations to confiscate Syria’s chemical weapons. Bashar al-Assad’s government accepted the Russian plan. U.S. Secretary of State John Kerry said the threat of a U.S. military strike against Syria is needed to spur a potential diplomatic outcome. President Barack Obama will outline his case for action in a televised address tonight.

“The market is no longer factoring in an American-led strike on Syria,” said Michael Wittner, head of oil market research at Societe Generale SA in New York. “Fears of an attack on Syria and a disruption of supply are fading fast. The Russian proposal has been picked up by various players, including the U.S.”

WTI crude for October delivery declined $2.13 to $107.39 a barrel on the New York Mercantile Exchange, the lowest settlement since Sept. 4. The volume of all futures traded was 5.4 percent above the 100-day average at 4:39 p.m.

Prices were little changed after the American Petroleum Institute reported U.S. crude inventories dropped 2.93 million barrels last week. The October contract fell $2.24, or 2.1 percent, to $107.28 a barrel at 4:36 p.m. It traded at $107.33 before the report was released at 4:30 p.m.

Brent Futures

Brent for October settlement decreased $2.47, or 2.2 percent, to end the session at $111.25 a barrel on the London-based ICE Futures Europe exchange. Trading volume was 39 percent higher than the 100-day average. The European benchmark traded at $3.86 premium to WTI, down from $4.20 at yesterday’s close.

Futures advanced last week amid concern of an escalation of the conflict. The U.S. says Assad’s regime used sarin gas outside of Damascus on Aug. 21, killing more than 1,400 people.

“War is bullish and peace is bearish, it’s as simple as that for traders,” said Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts. “Prices are clearly being dialed back because of the Russian proposal.”

Russia’s Interfax news agency cited Syrian Foreign Minister Walid al-Muallem as saying his government accepted the proposal. Muallem was in Moscow yesterday when Russia first announced its initiative, and said at the time he “welcomed” it.

French Proposal

France will ask the UN Security Council to approve a resolution demanding that Syria place its chemical arms under international control, Foreign Minister Laurent Fabius said today in Paris. The draft will call for Assad to be punished for the alleged chemical-weapons attack, Fabius said.

Fabius said the Russian proposal mustn’t be allowed to become a “diversion,” and the submission to the UN will help “nail down” the idea. Russia promised to flesh out the notion. The U.S. won’t let the plan become an excuse for inaction, Kerry told the House Armed Services Committee today.

“The Russian proposal suits everyone politically,” Wittner said. “The risk of an American military strike may not be past, though. There’s a lot to be fleshed out.”

Senate Majority Leader Harry Reid said diplomatic efforts to persuade Syria to surrender its chemical weapons should be given time to work, as a bipartisan group of senators led by Republican John McCain of Arizona and Democrat Charles Schumer of New York are drafting an alternative to the proposal authorizing a military strike.

‘Real Optimism’

“There’s real optimism that the Russian proposal will avert an attack,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York. “Here in the U.S., there’s been concern that Obama might not get the political support needed to launch an attack.”

Maria van der Hoeven, the International Energy Agency’s executive director, said at a conference in Tokyo today that oil markets are sufficiently supplied without any emergency stockpile release.

The Middle East accounted for about 35 percent of global oil output in the first quarter of this year, according to the Paris-based IEA, which advises 28 industrialized countries on energy policy. Syria borders Iraq, the largest crude producer after Saudi Arabia in the Organization of Petroleum Exporting Countries.

U.S. equities gained on Russia’s bid and after China’s National Bureau of Statistics said the nation’s industrial production and retail sales gained in August. The Standard & Poor’s 500 Index and the Dow Jones Industrial Average increased 0.7 percent.

Reverse Correlation

“Oil is taking a big hit because the Russian proposal has raised the prospect that the U.S. can avoid a military strike on Syria,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “You are getting a reverse correlation between the oil market and equities because of the latest Syria developments.”

Prices also fell after Sliman Qajam, a member of the Libyan parliament’s energy committee, said yesterday that crude output rose to 600,000 barrels a day. Crude will arrive at the Libya’s Zawiya refinery tomorrow, Mansur Abdallah, oil movement coordinator at the facility, said today by telephone from plant.

“I doubt that any improvements in Libyan output can be sustained,” Emerson said. “There’s not much confidence about the government’s ability to solve the country’s conflicts. We’ll probably continue to see progress followed by roll backs for the foreseeable future.”

U.S. Stockpiles

U.S. crude inventories probably declined by 2.1 million barrels to 358.1 million last week, according to the median estimate of 12 analysts surveyed by Bloomberg before a report from the Energy Information Administration tomorrow. That would be the lowest level since Aug. 31, 2012. The EIA is the Energy Department’s statistical arm.

Implied volatility for at-the-money WTI options expiring in November was 25 percent, down from 25.3 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 592,320 contracts as of 4:39 p.m. It totaled 606,889 contracts yesterday, 5.2 percent below the three-month average. Open interest was 1.9 million contracts.

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