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Thu 15 Nov 2012 11:03 AM

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Brent crude steady above $109 as Mideast tensions escalate

Oil rose, diverging from most other riskier assets, as Israel launched a major offensive on Gaza

Brent crude steady above $109 as Mideast tensions escalate
Brent oil slipped below US$109 per barrel on Monday.

Brent crude held steady above $109 a barrel on Thursday as Israeli strikes against the Gaza Strip renewed worries about supply disruption, while a weak global economic outlook kept gains in check.

Oil rose, diverging from most other riskier assets, as Israel launched a major offensive against Palestinian militants in Gaza and also announced there was more to come. But gains were capped as the United States and Europe grappled with their financial woes, pushing Asian shares and base metals lower.

"The overall economy is weak, but prices are biased to rise because geopolitical risks are going up," said Tony Nunan, a risk manager at Mitsubishi Corp. "That's going to be the story for the rest of the year - a weak economic outlook, but higher prices because of supply worries."

Brent crude gained 15 cents to $109.76 a barrel by 0514 GMT after settling $1.35 higher on Wednesday. US oil edged up 2 cents to $86.34, after ending 94 cents up.

"The threat of escalating Middle East tensions boosted the geopolitical risk premium in the market, supporting both crude markets," analysts at ANZ said in a note.

"Given the contrasting influences of weak demand prospects versus potential supply disruption concerns we think Brent and WTI could trend sideways for the rest of the week in volatile trading, unless we see more attacks in the Middle East."

The market is also keeping an eye on the negotiations in the United States over tax increases.

Investors are worried that a package of tax increases and spending cuts mandated to come into force next year if a deal is not agreed - the so-called "fiscal cliff" - will pitch the world's biggest economy and top oil consumer back into recession.

In Europe, policymakers are still trying to tackle the region's debt crisis. The euro zone likely slipped into its second recession since 2009 in the July-September period, as the three-year debt crisis slowed economic growth in Germany to a crawl.

"The economic news is not going to be good for now," Nunan said. "The US fiscal cliff and Europe are two main issues. And till the time there is more clarity, we will see risk assets under pressure."

Supply fears, coming as the oil market enters a peak seasonal demand period, and a weak consumption outlook will keep Brent swinging between $108 and $112 a barrel till the end of the year, Mitsubishi's Nunan said.

Carl Larry at Atlas Commodities brokerage in Houston expects oil prices to trade around $92 into the end of the year and Brent at $113.

Commenting on the overnight Israeli offensive, he said while the action has raised some fears in the market, "it is not enough to say we are headed back to $100".

According to 24-hour technical charts, Brent is expected to rise more to $111.65 per barrel, while a rebound target at $87.91 per barrel remains unchanged for US oil, Reuters market analyst Wang Tao said.

Data due later in the day from the federal Energy Information Administration (EIA) on US crude and product stockpiles will provide more direction to prices.

US crude oil inventories rose last week, while fuel stockpiles on the East Coast dropped sharply as the region struggled to restore operations battered by Superstorm Sandy, data from the American Petroleum Institute showed.

Total US crude oil stockpiles showed a build of 1.3 million barrels in the week to Nov. 9, short of forecasts for a 1.9 million barrel build, the API data showed. East Coast distillate stockpiles fell by more than 2 million barrels, while gasoline inventories declined by more than 1.2 million barrels.

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