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Crude Edges Higher on Middle East Tensions

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Oil futures ended slightly higher Wednesday, giving back some gains after a ceasefire between Hamas and Israel calmed fears that a broader war is on the horizon.

The modest increase capped a day marked by wide price swings and heavy news flow, even if trading volumes were thin ahead of the Thanksgiving Day holiday in the U.S. Some traders said the light trading activity exacerbated the effect of smaller trades and led to heightened volatility.

Crude prices briefly turned negative after the first reports that Israel and Hamas were calling off hostilities, following eight days of fighting in the Gaza Strip. Crude prices had been rising all week on the fighting, amid fears that the conflict could draw in other producing nations in the region or prompt a supply response from the Organization of Petroleum Exporting Countries.

"The fact that we didn't end even higher can be attributed to that ceasefire," said Eric Bickel, energy analyst at Summit Energy in Louisville, Ky.

Light, sweet crude for January delivery settled 63 cents, or 0.7%, higher at $87.38 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange recently traded $1.11, or 1%, higher to $110.94 a barrel.

Oil prices have rallied this week amid the escalating conflict, drawing the focus of the oil market back to simmering tensions in the Middle East. Analysts say macroeconomic factors--like unemployment and economic growth, which dictate oil demand--will remain important factors for crude prices, but the flare-up in the Middle East is likely to be paramount in the short term.

"The market continues to be fascinated with this whole Israel-Gaza" conflict, said Peter Donovan, vice president at Vantage Trading, a New York oil-options brokerage. "As hostilities escalate, the market goes higher. As the probability of a ceasefire comes to fruition, the market comes off."

Also helping to prop up prices Wednesday was a report from the U.S. government showing a drop in U.S. oil supplies of 1.5 million barrels. The drop bucked expectations from analysts, who were counting on a build of 800,000 barrels, according to a survey by Dow Jones Newswires.

Gasoline inventories last week fell 1.5 million barrels, while stocks of distillates plunged 2.7 million barrels. Refinery utilization rose 1.5 percentage points to 87.5% of capacity.

Notably, oil stockpiles at the Nymex oil hub of Cushing, Okla., rose 1.5 million barrels to 45.2 million barrels, the highest level there since August, the EIA said. A supply bottleneck there has led to excess oil and weighed on prices for more than a year.

"That continues to be an overriding bearish factor in the market," said Andy Lebow, senior vice president of energy futures at Jefferies Bache LLC.

Front-month December reformulated gasoline blendstock, or RBOB, settled 3.70 cents, or 1.4%, higher at $2.7495 a gallon. December heating oil settled 3.30 cents, or 1.1%, higher at $3.0722 a gallon.

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


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