Oil gains on geopolitical turmoil, QE outlook in focus

Both WTI and Brent benchmarks gained in early European trading on Friday and remained on track for posting a weekly advance amid persisting clashes between Egypts military forces and protesters supporting ousted Islamist President Mohamed Mursi. The conflict fueled concern over spreading to neighboring oil producing countries and endangering the flows and shipments of oil through the state-controlled Suez-Mediterranean pipeline and the Suez Canal.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $107.47 per barrel at 7:17 GMT, up 0.13% on the day. Prices held in a narrow range between days high and low of $107.57 and $107.10 per barrel respectively. Light, sweet crude settled yesterdays session at $107.33 per barrel, the highest close since August 1, extending current weeks advance to 1.2% after plunging 0.64% the preceding five-day period.

Meanwhile on the ICE, Brent oil for delivery in October stood at $109.75 per barrel at 7:17 GMT, marking a 0.13% daily advance. Prices ranged between days high and low of $109.82 and $109.32 per barrel respectively. The European benchmark closed at $109.36 yesterdays trading, the highest since August 1, bringing this weeks advance to over 1.4% after falling 0.65% the previous one.

Geopolitical risks

Oil prices extended gains on Friday on escalating political and social turmoil in Egypt. Hundreds of protesters supporting the recently ousted Islamist President Mohamed Mursi attacked with bombs and guns the governors offices in Giza near Cairo, resulting in the death of 11 security personnel. The deeply polarized Egyptian people braced for renewed conflicts on Friday as the Muslim Brotherhood, which is loyal to deposed Mursi, called for a nationwide march after hundreds of protesters were killed by security forces on Wednesday and were piled in a Cairo mosque on Thursday for their families to identify them.

Ben Le Brun, an analyst at OptionsXpress in Sydney, said for Reuters: “The unrest in Egypt is definitely having an impact and putting a floor on prices.”

Egypt is not an oil producer but the danger of conflicts spreading into neighboring oil producing countries shot prices up in July and continued to underpin the market in August. Meanwhile, a major part of Middle Easts pumped oil is transported to Europe through the state-controlled Suez Canal and Suez-Mediterranean pipeline transport. The region accounts for 35% of global output. So far, oil flows and shipments have remained undisturbed.

Meanwhile, protests which were holding back Libyas oil production and exports havent been resolved but recent announcements by the government indicated military force might be used to prevent security guards from striking and disrupting oil sales. Libya has restarted refined-product exports from its largest refinery, Ras Lanuf, but most export terminals, including the biggest, Es Sider, remain closed due to persisting protests.

ANZ analysts wrote in a note on Friday: “The Libyan governments warning that it will use military force to prevent striking security guards from selling oil independently, suggests the situation could easily escalate further.”

Oil prices were also supported by to the possibility of a tropical storm forming over the northwestern Caribbean Sea. It is being tracked by the U.S. National Hurricane Center. A reconnaissance plane may probe conditions today. Oil output is expected to stall as producers evacuate personnel from offshore platforms. According to the EIA, the gulf accounts for 23% of U.S. oil production, 6% of natural gas and 45% of refining capacity.

Phil Flynn, a senior market analyst at Price Futures Group in Chicago, said for Bloomberg: “It’s a tug of war between geopolitical fears and fears of taper. Traders also were watching Gulf platform evacuations.”

QE outlook

Oil gains however remained curbed as many market analysts expect the Federal Reserve to start paring its monetary easing program in as early as September. Yesterday, investors remained ambivalent about their expectations for Feds moves after controversial U.S. data was released on Thursday. Consumer inflation both on monthly and annual basis met projections for an advance, while the number of people who filed for initial unemployment payments last week fell to a six-year low. The U.S. Department of Labor reported Initial Jobless Claims declined to 320 000, the lowest since October 2007. This outperformed analysts’ expectations for a rise to 335 000 and was well below the preceding week’s upward revised reading of 335 000 from 333 000 people.

However, a separate report showed that U.S. industrial production remained flat in July, defying analysts’ projections for a 0.3% advance. Meanwhile, June’s reading received a revision to an expansion by 0.2%, down from 0.3%. Capacity utilization also fell and missed projections. The indicator contracted to 77.6% in July, underperforming expectations for a rise to 77.9%.

Data also showed manufacturing activity in Philadelphia expanded at the lowest pace since four months, following an unexpected drop of the New York Empire Manufacturing Index. The August Philadelphia FED Index was projected to decline to 15.0 from July’s reading of 19.8% but defied expectations and plunged to 9.3.

Market players will be keeping a close eye on Friday’s construction data and consumer sentiment in order to gauge the possibility of Fed to begin tapering its bond purchasing program next month. Tomorrow, both Building Permits and Housing Starts are projected to have advanced in July. Meanwhile, the Preliminary University of Michigan Confidence should have risen to 85.3 from 85.1in July, according to analysts’ expectations.