Oil hits 9-month high above $115 a barrel on Iraq conflict

  • Reuters, New York
  • Updated: Jun 20, 2014 12:25 IST

Brent crude hit a nine-month high of more than $115 a barrel on Thursday as the United States said it would send military advisers to Iraq, raising concerns about the escalating conflict.

Government forces continued to battle Sunni militants for control of Iraq's biggest refinery as US President Barack Obama said the United States will send up to 300 military advisers to Iraq to combat the extremist insurgency.

The Baiji refinery near Tikrit, 200 km (130 miles) north of the Iraqi capital, remained under siege as troops loyal to the Shi'ite-led government held off insurgents from the Islamic State of Iraq and the Levant and its allies who stormed the perimeter, threatening national energy supplies.

If the 300,000 barrels per day refinery stays closed, Baghdad will need to import more oil products to meet its own domestic consumption, further tightening oil markets. Brent rose 80 cents to $115.06 a barrel to settle at its highest since September 6. It had reached a high of $115.71 earlier in the session.

The U.S. crude oil futures contract for July, which expires on Friday, rose 46 cents to settle at $106.43. The price is now pushing toward a key resistance area at $106.75, according to Dwayne Pliska, a senior trading consultant at High Ground in Chicago, Illinois.

The spread <CL-LCO1=R> between the two benchmarks widened to close at $9.01 from a spread of $8.67 the previous session. Obama said on Thursday the United States will send military advisers to support Iraqi security forces and create joint operation centers in Baghdad and northern Iraq.

The United States is prepared to make targeted air strikes, Obama said, but said ground troops would not return to Iraq. Brent climbed towards $116 during Obama's speech as the market saw more buyers of call options than sellers, said Citigroup energy analyst Ed Morse. He added that the market's flurry around the time of the president's statement was a result of "real fast money and hedge funds".

"Markets are reacting to tomorrow's conditions," Morse said. However, fears over supply disruptions in Iraq might not be enough to support Brent prices further.

"I think we really need to see a disruption in supply before Brent can go higher," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

While fighting between Sunni militants and government-led forces continued north of Baghdad, the conflict had not yet spread to the country's southern regions, where most of Iraq's 3.3 million bpd of oil production is processed.

Uncertainty over potential export disruptions from Iraq has caused the spread between Brent and US crude oil to widen, causing a spike in gasoline and diesel prices. The NYMEX contract for reformulated gasoline blendstock hit its highest intraday since July.

"So far the impact on Brent has been much greater than on WTI. You would expect it to be that way initially, but the two benchmarks usually come together. Instead, WTI is continuing to trade flat," said James Williams, an energy economist at WTRG Economics in London, Arkansas. "That's rather unusual because the market is behaving rather realistically. It's reacting to fundamentals of supply and demand instead of threats."

After the Iraqi conflict is resolved, the spread between Brent and WTI may fall to about $5 a barrel, said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago. "The Iraq situation is probably going to be a short-term event in the scale of things," he said, adding that rising US supply would mute the impact of potential disruptions in Iraq.

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