Brent Holds Above $112 As Lingering Supply Fears Support

Bareksa.com - Brent futures held above $112 a barrel on Wednesday as lingering worries over the threat of a sudden worsening in the Iraq crisis supported prices, while a possible reopening of two oil terminals in Libya kept the gains in check.

The European benchmark dropped for a third day to trade near its lowest in nearly three weeks, but limited spare production capacity amid an improving demand outlook in China and the United States, the top two oil consumers, should help underpin the market.

Brent crude swung between $112.41 and $112.08 a barrel and was up 1 cent at $112.30 by 0622 GMT, after its lowest settlement since June 11. U.S. oil added 11 cents to $105.44. It also recorded its lowest ending since June 11.

"We are looking at sideways movement in oil. The situation in the Middle East won't allow prices to go down," said Tony Nunan, oil risk manager at Mitsubishi Corp in Tokyo.

"The summer driving season is getting underway in the United States and China isn't falling off the cliff."

Libyan rebels blockading key eastern oil ports have agreed to reopen the remaining two terminals at Es Sider and Ras Lanuf. Since last summer the port seizures have crippled Libya's oil industry.

If fulfilled, the deal would bring back around 500,000 barrels per day (bpd) of crude oil export capacity.

The overarching supply risks from Iraq and other key producers such as Nigeria, amid a healthier demand picture, look set to place the U.S. benchmark "firmly in the $100 camp", said Nunana.

Prior to the Iraq conflict, Nunan assessed the fair value of the contract at around the $90-level. Brent is likely to similarly remain supported, he said.

Sunnis and Kurds walked out of the first session of Iraq's new parliament after Shi'ites failed to name a prime minister to replace Nuri al-Maliki, dimming any prospect of an early national unity government to save Iraq from collapse.

GOING SPARE?

Prices have also been supported on worries of limited spare capacity to make up for any major loss in shipments. The world's unused spare oil production capacity would struggle to cover for another big outage, industry officials and analysts say, increasing the chance governments may tap strategic reserves should Iraq's southern exports be disrupted.

"Saudi Arabia is the only one that has significant spare capacity. So it is a real worry if there is any serious disruption in exports," said a trader with a north Asian trading house.

U.S. crude stocks fell by 876,000 barrels in the week to June 27 to 381.7 million, compared with expectations for a decrease of 2.2 million barrels, data from industry group the American Petroleum Institute showed on Tuesday.

Gasoline stocks dropped by 407,000 barrels versus forecasts of a 400,000-barrel gain. Distillate fuels stockpiles, which include diesel and heating oil, rose by 4.4 million barrels, against expectations of a 800,000-barrel gain, it said.

Investors are now awaiting official data from the Energy Information Administration (EIA) due later in the day to gauge the country's demand outlook. (Source : Reuters)