Brent falls toward $115 on possibility of Syria strike delay

Obama makes case for punishing Syria, Iran expands nuclear capacity

US president Barack Obama said a ‘tailored, limited’ strike could be enough to send a strong message to Syria that the use of chemical weapons cannot be tolerated. Photograph: Alex Wong/Getty Images
US president Barack Obama said a ‘tailored, limited’ strike could be enough to send a strong message to Syria that the use of chemical weapons cannot be tolerated. Photograph: Alex Wong/Getty Images

Brent crude dropped toward $115 a barrel today as the possibility of a delay in a US-led military strike on Syria helped calm worries on Middle East oil supply.

The West was gearing up for a military strike in response to last week's chemical weapons attack, although US president Barack Obama faced new obstacles with British allies and US lawmakers that could delay any imminent action.

Brent crude for October delivery hit a low of $115.15 a barrel and was at $115.40, down $1.21, by 6.56am GMT. It had jumped more than 5 per cent in the previous two sessions, its strongest 2-day gain since January 2012.

October US crude fell $1.01 to $109.09 a barrel following a near 4 per cent gain over the past two days.

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"If geopolitical tensions in Syria get caught up in diplomacy, then like Iran, the premium will erode and prices will retreat," said Jonathan Barratt, chief executive of Sydney-based commodity research firm Barratt's Bulletin.

Mr Obama said yesterday that a "tailored, limited" strike, not a protracted engagement like the unpopular Iraq war, could be enough to send a strong message that the use of chemical weapons cannot be tolerated.

Oil has jumped this week to multi-month highs on fears that the potential strike on Syria could spread unrest to major oil producers in the Middle East and disrupt supply.

"There are so many other parties involved when it comes to Syria," said Tony Nunan, a risk manager at Mitsubishi Corp. "Israel, Iran are close by and other countries could get dragged into it."

Oil is likely to stay above $110 with support from the Middle East uncertainty and as the Libyan oil supply situation has worsened, he said.

Libya's crude output has been cut to 250,000 barrels per day (bpd) from pre-war levels of 1.6 million bpd as workers' strikes crippled exports, prime minister Ali Zeidan said yesterday.

US crude stockpiles up

Iran could also return to focus as a report from the UN atomic agency showed the country has expanded its nuclear capacity, but delayed the commissioning of a reactor. Iran and the world’s major powers will resume talks on September 27th.

Brent's premium to US crude has risen to more than $6 a barrel, the widest since June, on expectations of rising supply at the US contract's delivery point in Cushing, Oklahoma.

US crude stockpiles rose almost 3 million barrels to 362 million barrels last week, data from the US Energy Information Administration showed yesterday, far exceeding a forecast of a 0.2 million barrel build in a Reuters poll.

Crude stocks at Cushing, Oklahoma, have dropped 26 per cent since the end of June to 36.59 million barrels, falling 837,000 barrels last week as crude supply is diverted elsewhere after pipeline bottlenecks eased.

Analysts expect US crude futures to weaken against Brent, keeping the price spread at more than $5 a barrel, as domestic production continues to rise from shale resources.

“While improved infrastructure will allow greater volumes to reach the Gulf Coast from Cushing, the inability to export US crude volumes will eventually ensure that the previous overhang of crude at Cushing will merely be transferred to the Gulf Coast,” BNP Paribas analysts said in a note.

Reuters