Brent Oil Futures Pare Biggest Monthly Gain Since August

Brent crude declined, trimming its biggest monthly gain since August, as the conflict in Iraq has so far spared the country’s main oil-producing region. Brent’s premium over West Texas Intermediate narrowed.

The al-Qaeda breakaway group in Iraq and Syria declared an Islamic caliphate in areas under its control, an assertion of authority meant to consolidate its power and erase the border between the two conflict-ravaged countries. The fighting hasn’t spread to southern Iraq, home to about three-quarters of the nation’s oil output. Brent reached a nine-month high on June 19 on speculation the escalating violence may disrupt supplies.

“We continue to back away from nine-month highs on easing fears that the conflict will spread to oil-producing areas,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The market’s main focus is still on geopolitical risk.”

Brent for August settlement declined 94 cents, or 0.8 percent, to end at $112.36 a barrel on the London-based ICE Futures Europe exchange. The volume of all futures was 16 percent above the 100-day average for the time of day. Prices advanced 2.7 percent this month and 4.3 percent this quarter.

WTI for August delivery retreated 37 cents, or 0.4 percent, to $105.37 a barrel on the New York Mercantile Exchange. Volume was about 2.3 below the 100-day average. Prices have risen 2.6 percent this month and 3.7 percent this quarter. Brent traded at a $6.99 premium to WTI, compared with $7.56 at the end of last week.

Civil War

The insurgent movement defined its Islamic state as stretching from Aleppo in northern Syria to the eastern Iraqi province of Diyala, according to an audio recording purportedly by its spokesman posted on websites and forums linked to radical Islamists. The group named its leader Abu Bakr al-Baghdadi as head of the caliphate.

The risk of civil war in Iraq flared this month after the militant group seized Mosul, the country’s biggest northern city, and advanced south toward Baghdad. The movement, which has changed its name to the Islamic State from the Islamic State in Iraq and the Levant, is also battling forces of Syrian President Bashar al-Assad.

“The Brent-WTI spread is narrowing on the idea, at least perceived, that the ISIS group isn’t making any further progress,” said Tom Finlon, director of The Energy Analytics Group LLC based in Jupiter, Florida. “Iraqi production is safe for the time being.”

Iraqi Output

Oil exports from Iraq, OPEC’s second-largest producer, will accelerate in July from 2.5 million barrels a day this month, Oil Minister Abdul Kareem al-Luaibi said in an interview in Baghdad on June 26.

Production by the 12-member Organization of Petroleum Exporting Countries rose by 278,000 barrels a day to 30.223 million in June, according to a survey of oil companies, producers and analysts. Iraqi output decreased 400,000 barrels to 2.9 million, according to the survey. It was the biggest drop in June and left the country pumping the least oil since September 2013.

Market risks associated with the Iraqi conflict are “priced in for the time being,” according to Societe Generale SA. Even so, an extended sectarian civil war is possible and may result in “intermittent and moderate supply disruptions” of as much as 500,000 barrels a day, Michael Wittner, a New York-based oil analyst at the bank, said in a report distributed today.

Crude Inventories

U.S. crude inventories probably fell by 2.25 million barrels last week, according to a Bloomberg survey before an Energy Information Administration weekly report July 2. Gasoline stockpiles increased 250,000 barrels and distillate fuels rose 850,000, the survey showed.

Gasoline futures for July delivery, which expired today, slid 2.18 cents to $3.077 a gallon on the Nymex. The more active August contract fell 3.09 cents to $3.0433. The fuel rose 2.7 percent this month and 5.7 percent in the quarter.

Ultra-low sulfur diesel for July delivery dropped 2.68 cents to $2.9708 a gallon. The more active August contract decreased 2.82 cents to $2.9753. Diesel gained 3 percent in June and 1.3 percent in the second quarter.

Before it's here, it's on the Bloomberg Terminal.