Oil Jumps as US Floats Plan for Diplomatic Action in Syria


Crude oil prices edged up in choppy trading on Wednesday as investors worried about whether diplomatic efforts to eliminate Syria's chemical weapons would avert military action that could disrupt oil supplies from the Middle East.

The small bounce up in crude prices ended a two-day slide that came as diplomatic efforts quelled fears of a military strike against Syria. Last week, crude prices surged on fears that unrest in Syria might spread to other parts of the Middle East, disrupting supplies from a region that pumps a third of the world's oil.

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"The market's given back as much as it's going to over Syria, and that attracted some buyers who are still worried about what's going to happen there," said John Kilduff, partner at Again Capital LLC.

Also supporting oil prices, investors remained uncertain about whether negotiations in Libya would end labor strikes at oilfields and ports that have disrupted oil exports.

Crude has also drawn support from recent positive economic data from China and the United States, although U.S. government oil data on Wednesday showed a smaller-than-expected decline in crude oil stocks, indicating weak demand.

Brent crude oil futures rose 25 cents to settle at $111.50. In the past two days, Brent fell more than 4 percent. On Tuesday, it dropped to a two-week low.

U.S. crude oil for October delivery rose 17 cents to settle at $107.56 a barrel.

U.S. oil prices were consolidating after three weeks of trading between $104 and $112 per barrel, said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut.

"The two-day retreat on easing fears has subsided," McGillian said. "The market is stabilizing again on how talks will proceed on the Russian proposal."

U.S. President Barack Obama vowed to explore a Russian initiative to neutralize Syria's chemical weapons, but he still sought support for his threat to use force if diplomacy fails.

As the geopolitical risk premium deflated Brent prices, the global benchmark's premium over U.S. oil <CL-LCO1=R> narrowed to $3.61 a barrel during the session. But Brent's premium widened back out to $3.94 at settlement, which was up from the previous settlement.

U.S. government data showed lackluster oil demand.

Crude stocks dipped by 219,000 barrels last week, a smaller decline than the decrease of 1.5 million barrels analysts had expected. Gasoline stocks rose unexpectedly, indicating that demand supported by summer driving season had ended.

U.S. gasoline futures settled at $2.71 a gallon, its lowest closing price since mid-January.

Libyan union and shipping sources said there were no substantial changes at ports and oilfields, crippled in the worst disruption to its oil industry since the civil war in 2011.

The U.S. Federal Reserve may decide next week to begin tapering its monetary stimulus, although last Friday's disappointing U.S. jobs data convinced many economists that any withdrawal will probably be gradual.

A cut in Fed stimulus would likely strengthen the dollar, hitting oil and other commodities priced in the greenback.

Brent oil was also seeing some support from continued supply disruptions in Libya. North Sea oil output is expected to rise in October but not enough to offset losses from Libya.

(Reporting by Anna Louie Sussman; Additional reporting by Jeanine Prezioso in New York, Peg Mackey in London and Osamu Tsukimori in Tokyo; Editing by Bob Burgdorfer and David Gregorio)