WTI above $100 on Egypt tension and drop in U.S. inventories

WTI crude rose for a third consecutive day as tension in Egypt continued to threaten Middle East oil supply and APIs weekly crude inventories report showed a higher than expected drop in inventories.

On the New York Mercantile Exchange, WTI for August delivery traded at $101.26 per barrel at 7:06 GMT, up 1.67% on the day. Prices held in range between days low at $99.43, open price, and $102.16, a 14-month high. Light, sweet crude rose for three consecutive days, surging more than 5% after settling 2.73% higher last week.

Meanwhile, Brent oil August futures stood at $104.81 a barrel at 7:07 GMT, up 0.78% on the day. Prices ranged between daily low of $103.90 and high at $105.59 per barrel, which was hit during the Asian session. The European benchmark advanced through three straight days, marking a 2.70% gain so far this week after settling 1.07% higher last week.

WTI surged to a 14-month low after Egypt President Mohamed Mursi made a statement saying he was democratically elected and that he will stand at his position. Military sources told Reuters that Egypts army has plans to push Mursi aside after his ultimatum expires and suspend the constitution.

Ben Le Brun, a markets analyst at OptionsXpress in Sydney said for Reuters: “Middle East tensions are always going to put a cushion under the price while there is some tight supply going on in the U.S. Its double positive news for crude.”

Turmoil in Egypt, which controls the Suez Canal and the Suez-Mediterranean Pipeline, threatens the supply of 2.24 million barrels per day from the Red Sea to Europe and North America.

Mark Keenan, a director of commodities research and strategy at Societe Generale SA in Singapore said for Bloomberg: “The strength in oil today is a function of the significant draw in the API numbers yesterday and the tension in Egypt. The situation in the country “has the risk, if it escalates, of potentially threatening oil output from the region through the Suez Canal or Suez-Med pipeline.”

Meanwhile, oil production in Libya contracted by a third after protesters shut several oilfields as the country still struggles to maintain stability in the vital for the economy oil industry. In Syria, the U.S. is expected to arm opposition with small arms within the month, which spurred concern of the conflict spreading to neighboring oil producing countries as most of them, including Iran, still support Bashar al-Assad’s regime.

U.S. oil reserves drop

Oil prices drew further support following yesterdays API report on oil inventories in the U.S., according to which Crude Oil Inventories dropped by 9.4 million barrels as of the week ending June 28. Gasoline stockpiles fell by 183 000 and distillate-fuel inventories dropped by 2.3 million. The industry-funded American Petroleum Institutes report however is considered as less reliable since it is based on voluntary information from operators of pipelines, refineries and bulk terminals. Investors will be looking ahead to verify this data with statistics from the Energy Information Administrations weekly report, due later on Wednesday.

According to a Bloomberg survey, EIAs report should show a 2.25 million barrels drop in crude oil reserves. Gasoline stockpiles are expected to have risen by 700 000 barrels and distillate fuel inventories should have gained 1 million barrels.

China economy slowing down

Meanwhile, oils gains are limited by Chinas economic slowdown that was supported by the latest PMI readings of the country. The China Securities Journal reported yesterday that the Asian nation’s economic growth might slow down to around 7.5%, which is generally in track with other analysts’ expectations. Last week, Goldman Sachs trimmed its GDP growth projection for China to 7.4%, down from 7.8%, while the 2014 forecast was cut to 7.7% from 8.4%.

On Monday, the National Bureau of Statistics and China Federation of Logistics and Purchasing reported China’s PMI fell to 50.1 last month, below May’s 50.8 figure, but above expectations of 50.0, which is the neutral level of the scale. Values above 50 indicate economic expansion and below 50 – contraction.

According to a separate private index prepared by HSBC and Markit Economics, operating conditions in China’s manufacturing sector worsened during June for a second month in a row. The Asian country’s HSBC PMI stood at 48.2 in June, down from May’s 49.2 reading and below projections of 48.3, straying further from the neutral level. Chinese manufacturers signaled a first reduction of output since eight months in June. Total new orders fell for a second month as client demand contracted. Staff numbers were also decreased, marking the fastest job shedding since last August.

Investors are now looking ahead into this week’s key U.S. data that will show if the economy’s recovery keeps in line with Fed’s projections. The ISM Non – Manufacturing Composite index is due on Wednesday, coupled with the Trade Account, which is expected to show a 40 billion deficit. On Wednesday, the ADP Employment Change and Initial Jobless Claims will give a preliminary insight into the U.S. labor market’s state, prior to Friday’s most important Change in Non-Farm Payrolls and Unemployment Rate indicators.