Hedge Funds Unfazed by Iraq as Bullish Brent Bets Cut

Hedge funds cut bullish bets on Brent crude to the lowest level in six months last week, another signal that traders expect supplies from Iraq to remain safe from an Islamist insurgency in the north of the OPEC member.

Brent futures traded near a nine-month low in London today as U.S. air strikes against Islamic State militants in northern Iraq reassured investors that oilfields in the adjacent Kurdish region would stay unaffected. Supplies from southern Iraq, home to about 85 percent of the nation’s output, continue to flow undisturbed by violence in the north, with Oil Minister Abdul Kareem al-Luaibi saying that exports will exceed 2.5 million barrels a day in August.

“For me, it’s justified,” Torbjoern Kjus, an analyst at DNB ASA in Oslo said of the pull-back by traders. “I wouldn’t be putting on any new positions. It’s going to be a mess in Iraq for a long time, but that doesn’t necessarily translate into lost oil barrels.”

Hedge funds and other money managers reduced net bullish bets on Brent futures to 97,351 contracts in the week to Aug. 5, the lowest since Feb. 4, data from the London-based ICE Futures Europe exchange showed today. Brent for September settlement rose 14 cents to $105.16 a barrel on ICE at 4:30 p.m. London time. The contract closed at $104.59 on Aug. 6, the lowest level since November 2013.

Improved Confidence

The U.S. military destroyed yesterday part of an Islamic State vehicle convoy moving to attack forces defending Erbil, the capital of the Kurdish region, the U.S. Central Command in Tampa, Florida, said in an e-mailed statement today.

“The strikes have helped improve confidence on the Kurdish side,” Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen, said by e-mail. “Given the U.S. commitment to bomb, if the Islamic State stick their neck out too far I would say the situation there is contained.”

Iraq’s President Fouad Masoum asked Haidar al-Abadi to replace embattled Prime Minister Nouri al-Maliki and form a new cabinet, in a bid to end the political deadlock that has hobbled the country’s efforts to roll back the insurgency.

Maliki, a Shiite Muslim whose policies have been blamed for pushing minority Sunni Muslims into an alliance with the radical Islamic State, earlier said he would challenge Masoum in court and then deployed troops on the streets of Baghdad.

Underestimating Dangers

Masoum tapped Abadi hours after U.S. Secretary of State John Kerry pulled support from Maliki, warning him not to hinder the political process. U.S. President Barack Obama has tied expanded military strikes against the al-Qaeda breakaway group to the formation of a more inclusive government that didn’t marginalize Sunnis and other minorities.

Traders exiting Brent are underestimating the dangers to supplies in Iraq and other politically unstable regions, according to Commerzbank AG. Selling of oil futures will probably abate as bullish positions have slipped below their long-term average, the bank estimates.

“We see no justification for the complacent attitude of players on the oil market given the geopolitical tensions and anticipate a rising oil price,” Carsten Fritsch, an analyst at the Frankfurt-based lender, said in a report.

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