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Oil rises to eight-week high on escalating Middle East tension

A view of oil production pipes at the Cenovus Foster Creek SAGD oil sands operations near Cold Lake, Alberta, July 9, 2012. (REUTERS/Todd Korol)

Oil advanced to the highest level in eight weeks on rising concern that the Middle East will lose stability, disrupting supplies from a region responsible for about 30 percent of world output.

Prices gained as much as 3.4 percent after Israeli Prime Minister Benjamin Netanyahu blamed Lebanon’s Iranian-backed Hezbollah organization for the killing of Israeli tourists in Bulgaria and threatened a forceful response. In Damascus, Syria, government forces battled rebels in retaliation for a blast that killed three top anti-insurgency leaders.

“People are very concerned about what’s going on in the Middle East and that’s giving oil a boost,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas- based energy consultant. “Iran is back in the spotlight and the situation in Syria is deteriorating. It increases geopolitical risk in the region and builds into fears that production may be disrupted.”

Crude for August delivery increased $2.91, or 3.2 percent, to $92.78 a barrel at 12:39 p.m. on the New York Mercantile Exchange after climbing to $92.90, the highest intraday level since May 22. Oil’s seven-day gain is the longest since Feb. 24. Prices are down 6.3 percent this year.

Brent oil for September settlement advanced $2.77, or 2.6 percent, to $107.93 a barrel on the London-based ICE Futures Europe exchange.

Five Israeli tourists, the Bulgarian bus driver and the attacker were killed in a suicide attack Wednesday at the airport in Burgas, a popular holiday spot on the Black Sea coast, the Bulgarian Foreign Ministry said on its website. Netanyahu said in a statement broadcast from his office that Israel would pursue and punish those who harm its citizens.

“You are seeing geopolitical premium with Netanyahu basically blaming Iran for the bombing,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Fear about supply disruption is the main driver out there Thursday.”

The incident comes amid heightened tension over the Islamic Republic’s nuclear program, which Israel says is intended to produce weapons to threaten or destroy the Jewish state. Iran has threatened to close the Strait of Hormuz, a transit point for about 20 percent of the world’s traded oil, as the EU imposed sanctions on Iranian oil on July 1.

Iran’s crude output will fall by 1 million barrels a day by the end of 2012 because of the EU sanctions, the U.S. Energy Department estimated in its July 10 Short-Term Energy Outlook. The country’s output fell to a 20-year low of 3.16 million barrels a day in June, according to Bloomberg estimates.

The Organization of Petroleum Exporting Countries will cut shipments this month as European sanctions on Iran took effect, tanker-tracker Oil Movements said in an emailed report.

“The Middle East is getting pretty ugly so you don’t really want to be bearish on oil,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “Syria is starting to look like it may just fall apart, and if Syria goes, potential for a regional war goes up quite a bit.”

At least 77 people were killed across Syria Thursday as security forces loyal to President Bashar Assad pounded rebel hideouts, the Local Coordination Committees in Syria said in an email.

Among the leaders killed Wednesday were Assad’s brother-in-law, Assef Shawkat, and Defense Minister Dawoud Rajhah.

The Middle East produced 27.7 million barrels a day of oil in 2011, according to BP Statistical Review of World Energy.

Oil also gained as U.S. stocks rose amid better-than-estimated earnings and increased speculation that the U.S. and China would move to support economic growth.

The Standard & Poor’s 500 Index advanced as much as 0.6 percent.

China can allow the fiscal deficit to widen if necessary to a size similar to 2009’s gap, Zhang Peng, a Beijing-based researcher with the Fiscal Research Institute at the Finance Ministry, said in a telephone interview.

Federal Reserve Chairman Ben S. Bernanke said on July 17 policymakers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment.

“People continue to speculate about stimulus,” said Phil Streible, a Chicago-based commodities broker at RJO Futures. “You’ve got geopolitical events going on everywhere. You almost have a small perfect storm going on for oil.”

 
A version of this article appeared in the print edition of The Daily Star on July 20, 2012, on page 5.

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