Oil Volatility Rebounds From Record Low as Iraq Violence Worsens

Oil-price volatility rebounded from the lowest on record as violence escalated in Iraq, the second-largest crude producer among the Organization of Petroleum Exporting Countries.

The 20-day historical volatility of Brent crude futures rose as high as 13 percent yesterday, according to exchange data compiled by Bloomberg. It fell to 7.2 percent on June 3, the lowest since the contract began trading in 1988. Islamist fighters extended their advance in Iraq, entering two northeast towns as government forces failed to halt an offensive that triggered concern over a civil war and prompted the U.S. not to rule out airstrikes.

“Volatility is a reflection of uncertainty,” Olivier Jakob, managing director of Switzerland-based researcher Petromatrix GmbH, said by phone today. “Up until last Friday, we were in a period where uncertainty in the market was low. Libya was out, and we knew, and nobody was expecting it to come back quickly. The market was pretty well supplied. This week we are back to having some uncertainty” because of Iraq.

North Sea Brent crude rallied to a nine-month high today as the unrest worsened in Iraq. The violence highlights the risk to production in a nation that’s forecast to provide about 60 percent of output growth among OPEC members, according to the International Energy Agency in Paris.

Fighters from a militant group known as the Islamic State in Iraq and the Levant, or ISIL, took over the nation’s western city Mosul and moved south toward Baghdad.

North of Baghdad

Iraqi Oil Minister Abdul Kareem al-Luaibi speculated yesterday that U.S. planes may bomb the country’s north as Islamist fighters battle for control of Tikrit, about 80 miles north of Baghdad.

“It’s fair to say that, in our consultations with the Iraqis, there will be some short-term, immediate things that need to be done militarily,” U.S. President Barack Obama said yesterday. He is under increased pressure to launch airstrikes to support Iraq’s army amid ISIL’s rapid advance.

“The recent spike in oil commodities has to do with Iraq,” Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital AG, a Zug, Switzerland-based hedge fund, said by phone. Any reduction in Iraqi supply would mean more demand for Saudi oil, a curtailment of spare capacity and increased volatility, he said.

Implied volatility, used to gauge the cost of options, increased to 16.3 percent on June 9, the highest since May 6, according to data compiled by Bloomberg. The Chicago Board Options Exchange’s crude oil volatility index rose to 31 percent to 19.17 yesterday, the biggest gain since .

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