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Oil Update: No Breakout So Far, but the Trend Remains in Place

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Plus, what is the relationship between gold and oil in the near future?

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From today's point of view, it seems that the situation hasn't changed much since last week because light crude is trading between $105 and $107 per barrel once again, just like it did a week ago. However, last week was very interesting and brought a significant improvement in the oil market -- a positive change that eventually turned out to be only temporary.

The crude market is always sensitive to Middle East conflict. Prices rose to $115 on the unrest in Libya two years ago and to $110 on Iran's nuclear program. During the previous week, our firm saw similar price action.

On Wednesday, light crude surged to its highest level since May 2011 on concerns that the conflict in Syria would spread and threaten oil supplies from the Middle East. According to Reuters, the price of crude oil gained 2.9% and reached over $112 per barrel as Foreign Minister Walid al-Muallem said that Syria's defenses would "surprise" the world if the US and its allies attempted military strikes.

Syria itself is not so important for the oil market, since it produced just 164,000 barrels per day of the 28.3 million pumped in the Middle East last year, according to BP's (NYSE:BP) "Statistical Review of World Energy." However, the fear here is that a strike on Syria would lead to a broader regional conflict. This region accounts for 35% of the world oil production. Syria borders Iraq and is near Iran, countries that together hold almost a fifth of the output capacity of the Organization of Petroleum Exporting Countries, according to Bloomberg estimates.

Iran, a longtime Syrian ally, warned that a US attack on Syria would drag the whole region into the conflict. Any use of military force in Syria would "engulf the whole region," Foreign Ministry spokesman Abbas Araghchi told reporters in Tehran. Russia also warned against an attack on Syria.

In the following days, the price of crude oil dropped as the UK and France said they favor waiting for the results of a United Nations' investigation into Syria's alleged use of chemical weapons. On Friday, WTI extended its decline for a third day after President Barack Obama said he would seek authorization from Congress before ordering military action against Syria, easing concern that an imminent strike would disrupt Middle East oil exports.

Taking the above into account, we can conclude that the geopolitical risk drove the market higher. Although the prospect of imminent attacks on Syria receded, it seems that as long as tension escalates in the region, specifically in Syria and Iran, you can expect prices to move higher.

Another factor that fueled the price of light crude were supply cuts in Iraq and Libya.

According to Bloomberg, Iraq will reduce daily exports of Basrah Light crude from the Persian Gulf in September to the lowest in at least 20 months. The Middle Eastern producer, the largest in the Organization of Petroleum Exporting Countries after Saudi Arabia, will ship about 52.86 million barrels, or 1.76 million barrels per day, from the Basrah Oil Terminal, according to the plan. This is the lowest since at least February 2012 when Bloomberg started tracking the data and compares with 2.09 million per day this month.

What about Libya? The North African nation's export capability has been crippled since members of the Petroleum Facilities Guard seized control of terminals last month to press for better working conditions.

Libya has reduced exports as a result of oil worker strikes and civil unrest. According to Libya National Oil Corp. Chairman Nuri Berruien, the nation's oil output may have dropped below 200,000 barrels per day amid protests, the lowest level since 2011.
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