Crude oil futures climbed over $1 in London trade Thursday as traders reacted to news of an explosion on a southern Iraq oil pipeline that is expected to crimp the country's oil exports.
Prices had been trading lower ahead of the news from the Iraqi oil hub of Basra, with traders continuing to follow moves in the U.S. dollar as the main driver of crude oil prices. But any further weakness in the dollar, combined with developments in Iraq could add considerable upside pressure to oil prices Thursday, analysts said.
"The Basra headline came out as the dollar is coming under some intraday pressure," says Oliver Jakob of Petromatrix. "Basra will add fire to fire if the dollar continues to be pressured."
At 1230 GMT, the front-month May Brent contract on London's ICE futures exchange was up 73 cents at $104.73 a barrel.
The front-month May light, sweet, crude contract on the New York Mercantile Exchange was trading 74 cents higher at $106.64 a barrel.
The ICE's gasoil contract for April delivery was up $13.50 at $960.75 a metric ton, while Nymex gasoline for April delivery was down 95 points at 273.34 cents a gallon.
The bombing of the key Zubair-1 crude pipeline - the largest pipeline feeding Iraq's main oil export terminal in Basra - will likely affect exports "heavily," an official from the South Oil Company said Thursday. Repairs to the facility were expected to take 72 hours, he said.
Shipping sources suggest that the rate of oil exports from southern oil terminals has slowed from 1.56 million barrels a day to 1.2 million barrels a day as a result of the flare up of unrest in the area.
Heavy fighting between Iraqi government forces and local militia in Basra - which produces more than 80% of Iraq's total output of 2.4 million barrels a day - have also disrupted production and exports of crude oil, the official said.
"We see events in Iraq as having taken a dangerous turn, with the stability of the southern oil system now starting to become a potential concern," said analysts at Barclays Capital.
"For oil production and export infrastructure, as well as the personnel required, to operate as normal during any extended period of intensified abnormality in the Basra area seems an unlikely outcome."
Despite the intial surge higher on news from Iraq, traders suggested that the developments would still vie with the dollar in determining price direction and levels Thursday.
Oil prices fell back from their intra-day highs achieved on the back of the Basra pipeline explosion, with the greenback clawing back some value against most major currencies Thursday.
"The main tenet that took us up here is the dollar," said Adrian Bingham-Walker, trader at CMC Markets in London. "It's more important than the Iraq development."
With gloomy economic sentiment feeding expectations of further U.S. interest rate cuts, investor appetite for crude oil futures is likely to continue, said Mike Wittner, global head of oil market research for Societe Generale in London.
"There's no reason for financial investor inflows into oil to dry up, no reason at all. The logic is quite straightforward: U.S. economic weakness equals lower interest rates equals a weak dollar equals demand for hedging equals (buying) oil. I think that story has a long way to go."