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Tensions Between Turkey, Syria Send Oil Higher

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Oil futures rallied Thursday in volatile trading, as rising tensions between Turkey and Syria raised fears over supply disruptions.

The concerns trumped a government report showing that U.S. crude stockpiles rose more than expected last week.

Light, sweet crude for November delivery settled 82 cents, or 0.9%, higher at $92.07 a barrel on the New York Mercantile Exchange. Brent crude on ICE Futures Europe settled $1.38, or 1.2%, higher at $115.71 a barrel.

Nymex crude shot 2% higher to nearly $93 a barrel intraday after unconfirmed rumors of a pipeline explosion resulting from the escalating conflict between Turkey and Syria roiled the market. Although many traders later dismissed the rumor, the widening conflict between the neighboring countries has underpinned crude prices in recent days amid fears that Syria's civil war is spilling over into its neighbors.

"It just shows how nervous the market is," said Andy Lebow, senior vice president of energy futures at Jefferies Bache. "Whatever the pipeline story is, the market rallied on it."

Although neither country is a major oil producer, Turkey is home to several major oil pipelines that transport crude from Iraq and Azerbaijan. The Turkish port of Ceyhan is the terminus for both the Baku-Tbilisi-Ceyhan Pipeline, which transports up to 1.2 million barrels a day of Azeri crude, and the Kirkuk-Ceyhan pipeline, which carries up to 1.65 million barrels a day of Iraqi crude, according to the U.S. Energy Information Administration.

The Iraq section of the Kirkuk-Ceyhan pipeline has been subject to frequent attacks in the past, often disrupting operations. In July, the BBC reported that the pipeline was shut down for a time after a blast that was blamed on Kurdish separatists.

Tensions between the countries were already high after Turkish fighter jets grounded a Syrian passenger plane traveling from Moscow to Damascus on suspicions of carrying weapons.

Oil prices lost much of their steam by midday, however, after the contracts pared some of their gains after the EIA reported a bigger-than-expected increase in U.S. oil stockpiles, amid weak demand and strong U.S. production.

Thursday's rally is the latest big price swing to overtake the oil market in recent sessions. Traders have been forced to balance concerns about supply disruptions in the Middle East against weak demand in the U.S. and Europe. On Wednesday, Nymex crude slumped 1.2% on demand concerns.

"It seems like there's plentiful supplies and certainly demand concerns," said Peter Donovan, vice president at Vantage Trading, an oil options brokerage. "But there's such a wild card in the Middle East."

U.S. oil inventories rose 1.7 million barrels to 366.4 million barrels, the highest level ever for the week since record-keeping began, according to the EIA. Analysts polled by Dow Jones Newswires expected an increase of just 600,000 barrels.

Gasoline stocks, meanwhile, fell 500,000 barrels. Stocks of distillates, including heating oil and diesel, fell 3.2 million barrels.

Gasoline stockpiles were expected to fall 400,000 barrels, while distillate inventories were seen falling 600,000 barrels, according to analysts.

Front-month November reformulated gasoline blendstock, or RBOB, settled 0.37 cent, or 0.1%, lower at $2.9556 a gallon. November heating oil settled 4.4 cents, or 1.4%, higher at $3.2571 a gallon.

Copyright (c) 2012 Dow Jones & Company, Inc.

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