Oil Futures Up on Mideast Tension

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange reversed higher from overnight lows, as traders covered short positions amid media reports indicating an increased Iranian military presence in the Strait of Hormuz where 30% of current world oil supplies flow.

"We're hearing about Iran conducting military exercises in the Strait of Hormuz, which kind of got the ball rolling," said Dan Flynn, energy analyst with Chicago-based Price Futures Group. "So with added tensions in the Middle East between Saudi Arabia and Iran, plus nobody wants to be caught short, because right now, we're trading headline to headline."

The news follows threats by Iran last month that it would disrupt oil moving through the strait if its oil exports were cut because of U.S. sanctions. U.S. sanctions on Iran's ability to acquire U.S. dollars take effect on Monday, Aug. 6, and on Iranian oil exports on Nov. 4.

Last week, Houthi rebels who are fighting a Saudi coalition in Yemen attacked two Saudi oil tankers in the Red Sea's Bab al-Mendeb Strait. The Houthis have support from by Iran, though Tehran denies involvement in the conflict.

Oil futures also moved higher after holding key support levels following a two-day selloff into overnight trade spurred by higher oil production by the Organization of the Petroleum Exporting Countries in July and an unexpected 3.8-million-barrel (bbl) build in U.S. commercial crude inventories during the week ended July 27 reported midweek by the Energy Information Administration.

While U.S. commercial crude stocks increased in late July, Cushing inventory declined for an 11th consecutive week, dropping stocks to their lowest level in 45 months at 22.4 million bbl. The Oklahoma supply hub, which EIA reports as having a working capacity at 77.505 million bbl, is very close to minimum operating levels estimated somewhere between 16 million and 22 million bbl. The low inventory level at Cushing, the delivery location for NYMEX West Texas Intermediate futures, has forced a change in arbitrage between Cushing and the U.S. Gulf Coast.

NYMEX September WTI futures settled up $1.30 at $73.45 bbl, reversing off long-term support at $66.89 after trading at a $66.92 six-week low on the spot continuous chart. ICE Brent crude settled $1.06 higher to $73.45 bbl. NYMEX September RBOB rose 2.3 cents to settle at $2.0681 gallon, while September ULSD futures settled 3.44 cents higher at $2.1318 gallon.

Brian Whary can be reached at brian.whary@dtn.com