WTI futures retreat as Ukraine worries may be overdone, US inventories in focus

West Texas Intermediate crude eased off yesterdays 5-1/2-month high as concerns over tension in Ukraine may have been overdone, but the built up geopolitical premium kept prices supported near the $104 mark. The latest signs of strength in the US economy also underpinned crude prices but expectations that government data tomorrow will show a seventh straight weekly gain in US crude oil inventories pressured the market.

On the New York Mercantile Exchange, WTI crude for delivery in April fell by 1.05% by 8:22 GMT to $103.83 per barrel, and held in a daily range between $104.96 and $103.60 per barrel. The US crude benchmark jumped to a 5-1/2-month high of $105.22 on Monday and settled the day 2.3% higher, the biggest advance in three months. The contract jumped by 0.4% last week and settled the month 5.2% higher.

Meanwhile on the ICE, Brent futures for settlement in the same month slid by 1.27% to trade at $109.79 a barrel, shifting in a daily range between $109.79 and $111.32 a barrel. The European benchmark rose by nearly 2% yesterday and closed at $111.20 a barrel, the highest level since December 27th. Brents premium to its US counterpart narrowed for a fifth day to $6.28 from $6.48 on Friday, based on closing prices, the lowest since October.

Oil prices surged on Monday as the conflict in Ukraine and growing tension between Russia and the US and EU rattled global markets and spurred concerns over disruptions in Russias energy supply to Europe. Ukraines U.N. Ambassador Yuriy Sergeyev said on Monday that Russia deployed 16 000 troops in the Crimea region and was gathering armored vehicles after President Vladimir Putin received a unanimous approval by his parliament to protect Russias interests in Ukraine.

As a response to Russian forces taking control of the peninsula, Ukraine mobilized its army. Meanwhile, President Barack Obama warned that Russia has violated international law and that the US and its allies are preparing tough sanctions to isolate Moscow.

Market tension eased to some extent on Tuesday after Interfax newswire reported, citing Kremlin spokesman Dmitry Peskov, that Putin troops exercising in the Leningrad region were ordered to return back to bases.

Ric Spooner, chief analyst at CMC Markets in Sydney, said, cited by CNBC: “The major support at the moment is the situation in Ukraine and the risk to European gas supply. There is a collective market view that they are likely to wait on developments before they take prices any further.”

Oil prices eased off 5-1/2-month high levels as yesterdays jump was seen as overextended and analysts awaited further news.

Michael Wittner, Societe Generales head of oil market research in New York, said in a note, cited by Bloomberg: “If a Russian natural gas disruption to Ukraine would have an impact on the oil markets, we believe that the International Energy Agency would quickly coordinate a release of strategic oil reserves.” He also added that the most significant outcome of this crisis could be a deterioration in relations between Russia and the West, which would have a negative impact on other crucial diplomatic issues such as Iran and Syria.

US data, inventories

Oil prices also drew support on Monday on better-than-expected economic data from the US, suggesting recent weak figures were largely due to the extraordinary cold weather. Consumer spending increased more than projected, registering a 0.4% jump in January, compared to both expectations and the preceding months 0.1% increase. Core Personal Consumption Expenditures rose by 0.1% on monthly basis, and by 1.1% year-on-year.

Meanwhile, manufacturing activity in the worlds biggest economy accelerated with the ISM Manufacturing PMI hitting 53.2 in February, compared to forecasts for a jump to 52.0 from Januarys 51.3, which was the lowest level since June.

Market players also eyed upcoming private and government oil inventories data from the US. According to a weekly Bloomberg survey of eight analysts, the Energy Information Administration is expected to report on Wednesday that US crude supplies rose by 1.15 million barrels in the seven days through February 28th, a seventh straight weekly advance, while distillate fuel and motor gasoline supplies are expected to have fallen by 1 million barrels each. A fifth straight decline in supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, would be supportive for crude prices.

The industry-funded American Petroleum Institute will release its separate report later today, but APIs figures are considered as less popular than EIAs numbers as they are based on voluntary information from operators of pipelines, refineries and bulk terminals, while the government requires reports to be filed with the EIA.