Oil Markets Poised for Record as Iraq Crisis Deepens
Oil markets have staged only a muted reaction to the bloody insurgency gripping OPEC's number two producer Iraq, but analysts warn any disruption to supplies could push prices to record peaks.
The offensive led by the Islamic State of Iraq and the Levant (ISIL) that has swept through the north of the country and is now threatening to rip Iraq apart has sent prices to nine-month highs but they remain $30 below the peaks hit in 2008.
"This contrasts with the period of civil war in Libya in early 2011 that halted production. Back then, oil prices, volatility and skew all reacted far more aggressively," said BNP Paribas analysts Harry Tchilinguirian and Gareth Lewis-Davies.
"The reason for the orderly advance this time is simple: we have not had an actual supply disruption."
Brent oil has risen by only 6.0 percent since the beginning of the latest crisis in Iraq to a high point of $115.71 in the middle of June.
The price had surged by almost 35 percent in 2011 to a high of $127.02.
Another example is the 16 percent the European benchmark jumped in a month to $128.40/bbl when the EU imposed an embargo on Iranian oil at the end of January 2012.
In Dubai, oil futures have even turned bearish, dropping a fifth from their May peak as traders fret about what impact the crisis in Iraq could have if it spills into the broader region.
"With the exception of the first couple of days following the onset of the Iraqi crisis, oil markets have remained admirably calm," said analysts at PVM.
That is mainly because there has been little actual disruption to exports from Iraq so far.
Insurgents have forced the shutdown of the country's main oil refinery but have not managed to break into the key Kirkuk oilfield in the autonomous region of Kurdistan or hit the main oil fields in the south.
OPEC's second-largest supplier produces around 3.3 million barrels of crude a day (bpd) and exported around 2.6 million in May -- less than the 3.52 million bpd the IEA estimates the cartel could produce if needed.
- Limited spare capacity -
Commerzbank argues any real disruption to exports is "very unlikely" as the militants are unlikely to make any real headway in the Shiite-dominated southern regions, which account for 90 percent of exports.
"It is first and foremost the fear of disrupted supply in Iraq that is causing the risk premium on the oil price to rise," said analysts at the bank.
"Assuming –- as we expect –- these interruptions fail to materialise, the oil price is likely to shed its fear-driven gains again, just like it did in the late summer of 2013, and to fall back to below the $110 per barrel level."
Still, as Abhishek Deshpande at Natixis argues, any substantial reduction in shipments "could take global spare capacity dangerously close to zero" and so push prices to above $120/bbl.
The problem could be particularly acute in the summer, when the 12-nations in OPEC tend to have less spare capacity due to higher demand, and so could force the IEA to release stocks to calm world markets as it has done in the past.
"Events in 2007-8 are clearly our closest guide to how high prices could go in such a scenario," said Deshpande.
Brent hit a record high of $147.50/bbl in June 2008 in the face of supply concerns and amid a commodities boom fuelled by low interest rates.
"That could lead to IEA releasing crude from its (strategic stocks), especially during the summer months when OPEC's remaining spare capacity would be unlikely to be sufficient to meet peak demand," Deshpande added.
In the worst-case scenario, where not only Iraqi supplies are hit but the conflict spills into the wider region and disrupts other exporters, Julian Jessop at Capital Economics predicts prices could hit new peaks.
He estimates there is a one in ten chance of this happening.
"If the crisis in Iraq worsens, instability could increase further in other parts of the Middle East. In these circumstances, it would not be difficult to imagine the price of Brent surging to new record highs above $140," Jessop said.
Source: Agence France Presse
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