Oil prices drop as fears wane about fallout from Syria strikes

[April 16, 2018]   By Amanda Cooper

LONDON (Reuters) - Oil eased on Monday after U.S. drilling activity rose and fears waned about escalating tensions in the Middle East following air strikes on Syria over the weekend.

The United States, France and Britain launched 105 missiles on Saturday, targeting what they said were three chemical weapons facilities in Syria in retaliation for a suspected poison gas attack on April 7.

The oil price had risen nearly 10 percent in the run-up to the strikes, as investors bulked up on assets, such as gold or U.S. Treasuries, that can shield against geopolitical risks.

By 1140 GMT on Monday, Brent crude oil futures <LCOc1> were down 83 cents at $71.75 a barrel, while U.S. crude futures <CLc1> were down 78 cents at $66.61 a barrel.

"As far as developments in Syria are concerned, the market has had a sigh of relief in the sense that there is no escalation, either diplomatically, or on the ground, following the intervention by the U.S., France and the UK," said BNP Paribas global head of commodity market strategy Harry Tchilinguirian.

"As a macro asset-allocator, if you want to hedge your portfolio against geopolitical risk, your prime candidate is oil, especially if that risk is in the Middle East."

Although Syria itself is not a significant oil producer, the wider Middle East is the world's most important crude exporter and tension in the region tends to put oil markets on edge.

"Investors continued to worry about the impact of a wider conflict in the Middle East," ANZ bank said.

Oil pumping facilities are seen at Venezuela's western Maracaibo lake in Venezuela, November 5, 2007. REUTERS/Isaac Urrutia/File Photo

Fund managers hold more Brent futures and options than at any time since records began in 2011, according to data from the InterContinental Exchange. [O/ICE]

Investors have added to their bullish positions in Brent, which now equal nearly 640 million barrels of oil, in nine out of the last 10 months, in part thanks to the premium of the front-month futures contract over those for delivery at a later date, known as "backwardation".

Backwardation makes it profitable to retain a bullish position in oil futures.

Aside from a flurry of profit-taking after the air strikes, oil also came under some pressure from another rise in U.S. drilling activity.

U.S. energy companies added seven rigs in the week to April 13, bringing the total to 815, the highest since March 2015, and nearly 20 percent higher than a year ago, services firm Baker Hughes said on Friday.

Despite this, Brent is still up more than 16 percent from its 2018 low in February.

(For a graphic on 'U.S. oil rig count' click https://reut.rs/2JJVaD3)

(Additional reporting by Henning Gloystein and Roslan Khasawneh in Singapore; Editing by Edmund Blair)

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