Oil at 14-month high on U.S. data and renewed Middle East unrest

Oil fell slightly during European trading on Monday after marking the biggest weekly gain since February 2011 as political turmoil in Egypt threatened to disrupt oil flow through the state controlled Suez Canal. Unexpectedly upbeat labor data in the U.S. on Friday boosted demand prospect in the worlds biggest consumer.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $103.13 per barrel at 7:04 GMT, down 0.09% on the day. Light, sweet crude hit a 14-month high of $103.98 during the early Asian session, after which a drop followed in European trading. The American benchmark surged more than 2% on Friday, marking a weekly gain of almost 7.3%, the biggest since February 2011.

Meanwhile on the ICE Futures Exchange, Brent oil for August delivery traded at $107.36 per barrel at 7:05 GMT, down 0.34% on the day. Brent crude surpassed the $108 mark during Asian trading, hitting the highest level since April after which a drop to daily low of $107.35 followed during European trading. The European benchmark settled more than 2% higher on Friday, extending last weeks gain to 5.59%.

Oil prices keep drawing support from the political turmoil in Egypt which didnt end with President Mursi being forced from power last week as protests for and against his support took place on the streets of Cairo and Alexandria on Sunday, renewing concern over disruptions of oil flows through the state-controlled Suez Canal and the Suez – Mediterranean Pipeline. This comes after Egypt’s army supported mass protests and forced President Mohamed Mursi from power on Wednesday, one year after his election. Adly Mansour was selected to replace Mursi as a military-appointed interim president.

On Friday, the al Ahram newspaper reported Egypt declared a state of emergency in the Suez and South Sinai provinces. However, a canal official said for Reuters that ports and shipping through the Suez canal have been operating normally.

Robin Mills, head of consulting at Dubai-based Manaar Energy Consulting and Project Management commented for Bloomberg: “The situation in Egypt is very serious”. He said that protest arent likely to affect oil flow and supply but investors are reacting to the situation out there.

U.S. data

Meanwhile, oil got a strong boost last week as surprisingly positive economic data released by the U.S. Labor Department showed the economy created more jobs than expected in June and Mays reading was revised up, showing a consistent recovery of the labor market. The Change in Non-Farm Payrolls indicator surpassed expectations for a 165 000 reading, surging to 195 000, aligning to May’s revised reading. The Unemployment Rate for June in the world’s biggest economy failed to meet expectations of a decline to 7.5% but remained unchanged at 7.6% compared to May.

Average Weekly Hours met projections and remained the same compared to June at 34.5 hours, whereas Average Hourly Earnings surged to 0.4%, surpassing projections of a 0.2% gain and above May’s 0.1% revised reading.

The exceedingly positive U.S. economic data supports oil prices in the short therm, while the market is underpinned by geopolitical risks in the Middle East. However, in the long-term, upbeat readings of U.S. indicators are in line with Feds requirements for an earlier Quantitative Easing deceleration, which would pressure down oil as it trades inversely to the dollar. Ben Bernanke, Fed chairman, announced after the latest FOMC meeting that the central bank will most probably taper its monetary stimulus during the second half of the year and bring it to an end by mid-2014, if the required signs of consistent economic recovery are provided. So far, most of the important U.S. indicators have succeeded to meet or surpass expectations, which is in line with Fed’s requirements. Raw materials have been fluctuating throughout the year following shifting expectations of Fed’s moves and news of an actual scale back will delivery a heavy blow to commodities.

Ben Le Brun, an analyst at OptionsXpress in Sydney, said for Reuters: “Whats underpinning the strength in the oil market is the tensions out of the Middle East. Theres been some cause for concern and thats going to continue to put a floor under oil prices. If we get some sort of resolution to the Middle East crisis then I think (a stronger U.S. dollar) is going to have a downward impact on oil.”

Meanwhile, oil prices were supported by a reduced supply forecast for the North Sea crude oil due to maintenance. Output is expected to fall by 11%. ANZ analysts wrote in a note on Monday: “Oil prices should be supported by tighter supplies. U.S. inventories tend to decline in the third quarter, while Brent loading programs show output of 754,000 barrels-per-day in August, down from 851,000 bpd in July.”

Last week, U.S. Crude Oil Inventories dropped well above expectations. In its weekly oil reserves report on Wednesday, the EIA said crude reserves fell by 10.3 million barrels to 383.8 million as of the week ending June 28. Refineries operated at 92.2% of their capacity last week. Gasoline production increased, while distillate fuel output decreased. Gasoline stockpiles fell by 1.7 million barrels, refuting forecasts. Distillate fuel inventories also outperformed projections, decreasing by 2.4 million barrels, whereas expectations were for a gain.