Global Energy Markets And The Iraq Factor
FNArena News - June 18 2014- Iraq oil production not under threat for now- Longer term growth aspirations compromised- Upside risk to prices through instability
By Greg Peel
Iraq controls the fifth largest oil reserves in the world, is currently producing oil at a rate of around 3 million barrels per day and has aspirations to increase its production materially over the next five to fifteen years, to add just under a further 3mmbbl per day, notes Morgan Stanley.
The world is currently consuming oil at the rate of just over 90mmbbls per day which is forecast to increase to just under 104mmbbls per day by 2030, driven by growth in economies outside of the OECD. The supply-side response is to be met primarily by “tight oil” (mainly US shale), Canadian oil sands and conventional supplies from the Middle East, including Iraq, and Brazil. Iraq’s production growth ambitions are expected to meet some 20% of global demand growth.
It is thus of no surprise the rapid incursion into Iraq by what we now appear to be calling ISIL – the Islamic State of Syria and the Levant – has caused some alarm within global energy markets.
At this stage ISIL has taken control of the west and north of Iraq, in which oil infrastructure is relatively sparse. The bulk of infrastructure lies in the east and south. ISIL has taken the Baji refinery near Mosul but that appears to be operating normally for now. The oil resources of Kurdistan in the north are well protected and indeed the Kurds have taken the opportunity in the confusion to seize the key oil region of Kirkuk.
The Iraqi army appears to have fractured along sectarian lines, forcing the retreat of Shiite soldiers to regroup and protect Baghdad while Sunnis have abandoned their posts in the face of the Sunni ISIL onslaught. Iran is predominantly Shiite and is thus sending its Revolutionary Guards to assist, underscoring the growing irrelevance of the British-drawn borders of Syria, Iraq and Iran and the growing division of the region along Sunni-Shia lines. The US will likely offer some assistance short of “boots on the ground”.
Global oil markets have not responded in an overly panicked fashion. A geopolitical premium had already been built into the prices of oil before now given the Ukraine-Russia stand-off and disruptions in Libya due, again, to sectarian hostilities. To date the prices of Brent and West Texas Intermediate crudes have seen only around another US$3/bbl premium added to represent the Iraq problem. This implies markets have faith at this time that ISIL will not successfully push further into the country and secure vital oil infrastructure.
Morgan Stanley does not expect a material disruption to Iraqi oil exports. Without such disruption, MS believes market fatigue will lower that geopolitical premium in coming months. Deutsche Bank agrees that “this sanguine approach to oil price spike risk reflects the fact that major oil infrastructure in Iraq has not (yet) fallen into the hands of the militant extremists”.
That said, the Iraq-Turkey pipeline travels through the north of Iraq and has the capacity to export 600,000bbls per day. The pipeline had been exporting 200-300,000bbls per day until it was shut down for repairs in early March, due to persistent damage. With the pipeline closed, Baghdad is losing around US$20m per day in export revenues, notes Citi, at a time when funds are needed for imported military equipment to deal with the Sunni insurgency. Either way, ISIL now controls the pipeline.
The question for analysts is not so much one of short term impact, but of longer term impact.
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