Middle East tension stokes crude oil supply worries

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Brent crude climbed towards $116 a barrel on Friday, its highest level in more than three months, as escalating tension in the Middle East stoked supply worries.

Brent is set for its biggest weekly gain in two months, while U.S. crude is on track to rise for an eighth straight week, matching a similar winning streak in July-August 2004.

But disappointing economic data from China, the world’s second largest oil consumer, capped gains. The official purchasing managers’ index (PMI) missed market expectations, underscoring that the economy is making only a mild recovery from its weakest year since 1999.

Brent had risen 23 cents to $115.78 a barrel by 0737 GMT, after an earlier high of $115.91 marking its highest since mid-October. U.S. crude edged up by 9 cents to $97.58.

The spread between Brent and U.S. crude widened by 16 cents to minus $18.22 on concerns about rising crude stockpiles in the U.S. Midwest, and as the Seaway pipeline operator said it would be the second half of the year before it completes a lateral pipeline from its Jones Creek terminal in Texas.

“I would have thought that PMI data just might have taken some of the gloss off risk assets across the board,” said Ben Le Brun, market analyst at Sydney-based OptionsXpress.

“Perhaps there’s a little bit more to play out in terms of oil. It wouldn’t surprise me to see traders pay back some of the gains for the week a little bit this afternoon.”

Prices also got some support from a private survey released by HSBC showing growth in China’s giant manufacturing sector hit a two-year high in January, backing expectations a rebound would be led by domestic demand rather than exports. “If the Chinese PMI readings today were disappointing it was only mildly so,” Tim Waterer, senior trader at CMC Markets, said in a note.

“It is almost a case of ‘take your pick’ as to which PMI number (the government one or the HSBC one) is the most accurate reflection of the manufacturing story in China, with bullish traders likely to focus on the HSBC reading, while the bears will place more stock on the official reading.”

Investors will be keeping an eye on U.S. nonfarm payroll data, due at 1330 GMT, for further clues on the strength of the global economy and signs that sluggish fuel demand will improve. The numbers are expected to show a rise of 160,000 jobs and a steady unemployment rate.

“If (the U.S. nonfarm payroll data) misses expectations then I would expect a little bit of that premium to come off oil prices,” Le Brun said.

The U.S. Federal Reserve this week left in place its bond-buying stimulus plan, known as quantitative easing, bolstering hopes for economic growth.

“Brent has had a phenomenal run in recent times ... after the announcement of ‘QE3’, oil was not performing quite as strongly as some analysts were predicting, so maybe it’s just playing a bit of catch-up now from the fact that the Fed has reiterated its bond buying program,” Le Brun added.

Supply worries stemming from conflict in the Middle East buoyed prices of Brent, the main gauge for global oil prices.
Syria protested to the United Nations on Thursday over an Israeli air strike on its territory and warned of a possible “surprise” response.

U.S. Secretary of State Hillary Clinton urged Iran and Russia on Thursday to rethink their support for Syria, saying the most dire scenarios of the conflict spilling beyond its borders could come to pass.

Clinton told reporters there were signs Iran was sending more people and increasingly sophisticated weaponry to support Syrian President Bashar Al Assad in his 22-month battle against rebels seeking to end his family’s four decades of authoritarian rule.

Tension over Iran’s uranium enrichment plan continued to bubble after a plan to upgrade its refining equipment was delivered to the UN nuclear agency.

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