Oil Drops as Escalating Iraq Violence Seen Sparing Crude Supply

Brent dropped for a third day and West Texas Intermediate declined amid speculation that Iraqi oil production won’t be disrupted by escalating violence in OPEC’s second-largest producer.

Futures decreased as much as 0.4 percent in London. While Islamist militants in Iraq have taken control of the Baiji refinery in the north and extended territorial gains to the Jordanian border, they haven’t spread violence to the south, home to more than three-quarters of the country’s crude output. In the U.S., a government report tomorrow may show oil supplies slid for a fourth week, according to a Bloomberg News survey.

“The rise that we’ve seen recently is about building in a risk premium for a potential acceleration of the Iraq situation,” said Michael McCarthy, a chief strategist at CMC Markets in Sydney who predicts investors may buy Brent contracts if prices decline to about $110 a barrel. “We’re likely to see this jagged trading continue, where the oil price spikes on news and drifts back as we wait further developments.”

Brent for August settlement dropped as much as 50 cents to $113.62 a barrel on the London-based ICE Futures Europe exchange and was at $113.83 at 12:25 p.m. Singapore time. The contract slid 0.6 percent to $114.12 yesterday, declining the most since May 16. The volume of all futures traded was 42 percent above the 100-day average. Prices are up 2.7 percent this year.

WTI for August delivery fell as much as 92 cents to $105.25 a barrel in electronic trading on theNew York Mercantile Exchange. The U.S. benchmark crude traded at a discount of $8.11 to Brent, from $7.95 yesterday.

Iraq Fighting

Brent rose 1.2 percent for a second weekly gain in the period ended June 20 as the unrest in Iraq fanned concern that oil supplies may be threatened. The nation pumped 3.3 million barrels a day last month, data compiled by Bloomberg show, making it the largest producer after Saudi Arabia in the 12-member Organization of Petroleum Exporting Countries.

The Iraqi army withdrew from remaining positions at Baiji, north of Baghdad, late yesterday after almost two weeks of fighting, local police said by phone. The refinery is now in the control of tribes fighting alongside the Islamic State in Iraq and the Levant, Al-Arabiya television reported, citing Abu Abd al-Nuaimi, a spokesman for the tribal group.

The crisis flared this month when insurgents captured the northern city of Mosul and advanced to towns just north of Baghdad as Iraqi forces failed to halt their gains.

U.S. Stockpiles

U.S. crude supplies probably shrank by 1.4 million barrels last week to 384.9 million, according to the median estimate of seven analysts in the Bloomberg survey before an Energy Information Administration report. Stockpiles reached 399.4 million through April 25, the highest level since the Energy Department’s statistical arm started publishing weekly data in 1982.

Gasoline inventories expanded by 1.5 million barrels, the survey shows. The peak U.S. driving season typically starts on Memorial Day, which came on May 26 this year, and runs through Labor Day on Sept. 1.

The American Petroleum Institute is scheduled to release separate supply data today. The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the EIA.