Oil Heads for Third Yearly Gain on Iran Tension, U.S. Economy Speculation

By Ann Koh and Ramsey Al-Rikabi - Dec 30, 2011 2:41 PM GMT+0700

Oil rose for a second day, heading for a third yearly increase, on speculation escalating tension in the Middle East may disrupt supplies as a recovery in the U.S. economy bolsters demand.

Futures advanced for the eighth day in nine, extending this year’s gain to 9.3 percent. A U.S. State Department spokeswoman yesterday called Iran’s threats to shut the Straits of Hormuz “irrational behavior.” About one-sixth of global supply travels through the seaway. The country faces sanctions on its crude exports and a possible boycott by European oil buyers over its nuclear program. Prices gained yesterday after U.S. jobless claims fell to a three-year low.

“With both the Brent price and West Texas sitting roughly on $100, these types of prices are related very much to the overall geopolitical risk premium,” said David Land, the head of analysis at CMC Markets Ltd. in Sydney, who expects oil to outperform other commodities next year. “Compared to the wider commodity space, oil is one area that I’d be more bullish on.”

West Texas Intermediate crude for February delivery gained as much as 51 cents, or 0.5 percent, to $100.16 a barrel on the New York Mercantile Exchange. It was at $99.83 at 3:38 p.m. Singapore time, headed for a second weekly increase. Oil climbed 15 percent in 2010.

Brent for February settlement was at $108.14 a barrel, up 13 cents on the London-based ICE Futures Europe Exchange, headed for a 14 percent increase this year. The European contract’s premium to New York crude was $8.31.

Price Fluctuation

Crude surged to the highest in more than two years in May, trading at $114.83 in New York after a popular uprising in Tunisia sparked similar protests across the Middle East and North Africa. Clashes in Libya between rebels and forces loyal to then-leader Muammar Qaddafi cut off more than 1.5 million barrels a day of oil exports from the country.

A meeting of the Organization of Petroleum Exporting Countries broke down June 8 when six members, including Iran and Venezuela, opposed a Saudi Arabian-led push to supply more oil to compensate for lost Libyan output. The International Energy Agency responded with a coordinated release of 60 million barrels of emergency oil stockpiles on June 23.

Prices gave up the year’s gains by August amid concern the U.S. economic recovery was stalling and speculation that Libya would resume oil production faster than expected after Qaddafi’s ouster that month. New York crude slipped to $74.95 on Oct. 4, the lowest in a year, as Europe’s escalating debt crisis sapped confidence in the health of the global economy.

Iran, Confidence

An improving economic outlook in the U.S., combined with the escalation of tension in the Middle East, has taken prices back above $100 a barrel, even as Europe’s debt crisis threatens to plunge the region into recession and China shows signs of weaker growth.

Iranian Vice President Mohammad Reza Rahimi issued a warning to shut the Straits of Hormuz in a Dec. 27 report published by the state-run Islamic Republic News Agency. About 15.5 million barrels of oil a day passes through the waterway between Iran and Oman at the mouth of the Persian Gulf, according to the U.S. Energy Department.

“We’ve seen quite a bit of irrational behavior from Iran recently,” said Victoria Nuland, a State Department spokeswoman, when asked yesterday about Iran’s threats. “One can only guess the sanctions are beginning to pinch.”

A U.S. aircraft carrier was spotted in the area where Iran is conducting naval exercises, state-run Islamic Republic News Agency reported yesterday, citing the navy’s Deputy Commander Mahmoud Mousavi. Iran’s navy started the exercises on Dec. 24 and plans to conclude the drills on Jan. 4, the news agency reported.

‘Geopolitical Premium’

The country pumped 3.56 million barrels a day of crude in November, according to data compiled by Bloomberg, making it the second-largest producer in OPEC after Saudi Arabia.

“For a country that relies so heavily on oil exports like Iran does, it’s obviously not something that they would do lightly,” said Land. “But certainly the threat of it is enough to add back the geopolitical premium we’re seeing.”

Prices may rise next week amid Iran’s threat, a Bloomberg News survey showed. Thirteen of 32 analysts, or 41 percent, forecast oil will increase through Jan. 6. Ten respondents, or 31 percent, predicted prices will decrease and nine estimated there will be little change.

U.S. Economy

Oil also gained today on signs the U.S. economy is weathering Europe’s debt crisis. The four-week moving average for jobless claims dropped to 375,000 last week, the lowest level since June 2008, Labor Department data showed in Washington yesterday.

“At this stage, WTI looks like it’s found a fairly comfortable range at $95 to $100,” Land said. “If the U.S. starts showing better-than-expected improvement, that would go a long way to make the outlook for the global economy more rosy than currently.”

Oil prices in the U.S. and Europe became dislocated in 2011 as the loss of Libyan supplies, used primarily by refiners in Europe, combined with a glut of crude at WTI’s delivery point in Cushing, Oklahoma, to push Brent to a record $28.08 a barrel above New York futures on Oct. 14.

Brent-WTI

The premium has since narrowed more than 70 percent, settling at $7.93 on Dec. 27, the lowest since January, after Enbridge Inc. and Enterprise Products Partners LP said they would reverse the 500-mile (805-kilometer) Seaway pipeline from Cushing to refineries on the Gulf Coast, opening an outlet to clear supplies.

Total U.S. crude inventories (DOESCRUD) rose 3.9 million barrels to 327.5 million in the week ended Dec. 23, the Energy Department reported. Supplies were forecast to drop 2.5 million barrels, based on the median of 10 analyst estimates in a Bloomberg News survey. Stockpiles at Cushing shrank to 29.9 million barrels, the lowest since February 2010.

To contact the reporters on this story: Ann Koh in Singapore at akoh15@bloomberg.net; Ramsey Al-Rikabi in Singapore at ralrikabi@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net