Oil Surges on Speculation of Supply Disruption in Middle East

By Moming Zhou and Mark Shenk - Dec 14, 2011 4:53 AM GMT+0700

Oil rose the most in almost four weeks on speculation that supplies from the Persian Gulf would be disrupted after a report that Iran will hold drills to practice closing the Strait of Hormuz.

Futures advanced 2.4 percent as the state-run Fars news agency said Iran was planning military maneuvers at the strait, a bottleneck for Gulf shipments. Oil rose as much as 3.6 percent in intraday trading before paring gains on a denial by Iran’s Foreign Ministry that the country is closing the waterway.

“Crude oil is one of the most susceptible commodities to geopolitical risks and traders will react to anything in the Middle East that has potential to disrupt oil supplies,” said Sal Gilbertie, president of Santa Fe, New Mexico-based Teucrium Trading LLC, a sponsor of exchange-traded funds based on crude and natural gas.

Oil for January delivery gained $2.37 to settle at $100.14 a barrel on the New York Mercantile Exchange, the biggest increase since Nov. 16. Earlier, futures touched $101.25 a barrel. Prices have risen 9.6 percent this year.

Futures were little changed from the settlement after the American Petroleum Institute reported that oil inventories rose 462,000 barrels to 334.6 million last week. January crude gained $2.19, or 2.2 percent, to $99.96 a barrel in electronic trading at 4:42 p.m.

Brent oil for January settlement increased $2.24, or 2.1 percent, to $109.50 a barrel on the London-based ICE Futures Europe exchange.

Strait Open

The strait remains open to shipping, said Ramin Mehmanparast, a Foreign Ministry spokesman. Comments about the closure were made by people who don’t have an official title, he said. The Fars report cited Parvis Sorouri, a member of the parliament’s national security and foreign policy committee.

“If the world wants to make the region insecure, we will make the world insecure,” he said in remarks that first appeared yesterday on the website of the state-run Iranian Students News Agency.

Oil also rose on speculation that the Federal Reserve will announce a third round of bond purchases in a tactic that has been dubbed quantitative easing. The Fed bought a total of $2.3 trillion in bonds from December 2008 to June 2011.

The Fed said in a statement at the conclusion of its meeting today that the economy in the U.S. is maintaining its expansion even as the global economy slows. It refrained from taking new action to lower borrowing costs or announcing additional stimulus measures.

Nuclear Report

European governments are weighing a boycott of Iranian oil after a Nov. 8 report from the United Nations’ International Atomic Energy Agency that said the country was working on a nuclear weapons program as recently as last year, a charge the Islamic republic denies.

The European Union added 180 Iranian officials and companies to a blacklist earlier this month to pressure Iran to curtail its nuclear program. The move followed penalties imposed by the U.S. in November.

“We’re seeing a return of geopolitics to the market,” said John Kilduff, a partner at Again Capital LLC, a New York- based hedge fund that focuses on energy. “The military exercise in the Strait of Hormuz signals an escalation in tension and has serious implications for the flow of oil.”

About 15.5 million barrels of oil a day, or a sixth of global consumption, flows through the Strait of Hormuz between Iran and Oman, according to the U.S. Department of Energy.

Iran pumped 4.25 million barrels a day of oil in 2010, 5.2 percent of the world’s total production, according to BP Plc’s Statistical Review of World Energy. It’s OPEC’s second-largest producer after Saudi Arabia.

‘Shock Wave’

“This is the kind of story that sends a shock wave through the market,” said Rich Ilczyszyn, chief market strategist and founder of IiTrader.com in Chicago.

Oil ministers from the 12-nation Organization of Petroleum Exporting Countries are scheduled to meet tomorrow in Vienna. Members agree that the group should set a production ceiling of 30 million barrels a day, an OPEC delegate said today.

OPEC may not allocate individual quotas to each country, the person said, declining to be identified because the matter hasn’t been decided.

“There are Iran and OPEC headlines but none explain this move,” said Mike Wittner, head of oil-market research at Societe Generale SA in New York. “The Iranian exercise was announced earlier. They have held many exercises in the Strait of Hormuz over the years and so have the allied navies.”

An Energy Department report tomorrow will probably show that U.S. crude oil inventories fell 2.5 million barrels last week, according to the median estimate of 12 analysts polled by Bloomberg News. The industry-funded American Petroleum Institute will release its supply data at 4:30 p.m. today in Washington.

Oil volume in electronic trading on the Nymex was 730,702 contracts as of 4:39 p.m. in New York. Volume totaled 539,270 contracts yesterday, 18 percent below the three-month average. Open interest was 1.33 million contracts.

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

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