Bloomberg News

Oil Rises to Two-Month High on Rising Mideast Tension

July 19, 2012

Oil advanced to the highest level in two months on rising concern that instability in the Middle East will disrupt supplies from a region responsible for about one- third of world production.

Prices gained for a seventh day after Israeli Prime Minister Benjamin Netanyahu blamed Lebanon’s Iranian-backed Hezbollah organization for yesterday’s killing of Israeli tourists in Bulgaria and threatened a forceful response. In Damascus, Syrian government forces battled rebels in retaliation for a blast that killed three top anti-insurgency leaders.

“People are very concerned about what’s going on in the Middle East and that’s giving oil a boost,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas- based energy consultant. “Iran is back in the spotlight and the situation in Syria is deteriorating. It increases geopolitical risk in the region.”

Crude for August delivery increased $2.79, or 3.1 percent, to settle at $92.66 a barrel on the New York Mercantile Exchange. The price has risen 10 percent in seven days of gains, the longest such streak since Feb. 24. Prices are down 6.2 percent this year.

Brent oil for September advanced $2.64, or 2.5 percent, to settle at $107.80 a barrel on the London-based ICE Futures Europe exchange.

‘Geopolitical Premium’

Five Israeli tourists, a Bulgarian bus driver and the assailant were killed in the suicide attack yesterday at the airport in Burgas, a popular holiday spot on the Black Sea coast, the Bulgarian Foreign Ministry said on its website. Netanyahu said in a statement broadcast from his office that Israel will pursue and punish those who harm its citizens.

“You are seeing geopolitical premium with Netanyahu basically blaming Iran for the bombing,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Fear about supply disruption is the main driver out there today.”

The incident comes amid heightened tension over the Islamic Republic’s nuclear program, which Israel says is intended to produce weapons for use against the Jewish state. Iran has threatened to close the Strait of Hormuz, a transit point for about 20 percent of the world’s traded crude, as the European Union imposed sanctions on Iranian oil on July 1.

Iran Output

Iran’s crude output will fall by 1 million barrels a day by the end of 2012 because of the EU sanctions, the U.S. Energy Department estimated in its July 10 Short-Term Energy Outlook. The country’s production fell to a 20-year low of 3.16 million barrels a day in June, according to Bloomberg estimates.

The Organization of Petroleum Exporting Countries will cut shipments this month as the sanctions on Iran take effect, tanker-tracker Oil Movements said in an e-mailed report.

“The Middle East is getting pretty ugly so you don’t really want to be bearish on oil,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “Syria is starting to look like it may just fall apart, and if Syria goes, potential for a regional war goes up quite a bit.”

At least 77 people were killed today as forces loyal to President Bashar al-Assad pounded rebel hideouts, the Local Coordination Committees in Syria said in an e-mail. Among the leaders killed yesterday were Assad’s brother-in-law, Assef Shawkat, and Defense Minister Dawoud Rajhah.

The Middle East produced 27.7 million barrels a day of oil in 2011, according to BP Statistical Review of World Energy.

Stimulus Speculation

Oil also gained as U.S. stocks rose amid better-than- estimated earnings and increased speculation that the U.S. and China would move to support economic growth. The Standard & Poor’s 500 Index advanced as much as 0.6 percent.

Federal Reserve Chairman Ben S. Bernanke said on July 17 policy makers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment.

China can allow the fiscal deficit to widen if necessary to a size similar to 2009’s gap, Zhang Peng, a Beijing-based researcher with the Fiscal Research Institute at the Ministry of Finance, said in a telephone interview.

“People continue to speculate about stimulus,” said Phil Streible, a Chicago-based commodities broker at RJO Futures. “You’ve got geopolitical events going on everywhere. You almost have a small perfect storm going on for oil.”

Electronic trading volume on the Nymex was 602,757 contracts as of 3:15 p.m. in New York. Volume totaled 550,320 contracts yesterday, 1.2 percent below the three-month average. Open interest was 1.4 million.

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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