The Iraq crisis and its effects on oil

The International Energy Agency (IEA) has suggested that violence in Iraq is the biggest risk to new supply this decade from any nation in the Organization of Petroleum Exporting Countries (OPEC).

In support of this view, the Brookings Institution states that future oil prices are more dependent on increasing Iraqi production than North American shale. The IEA holds that “over the current decade, Iraq accounts for around 45% of the anticipated growth in global output”.

This growth now looks to be threatened by increasing conflict in the region, and oil prices are being affected as a result. According to the BBC, the price of Brent crude has made a series of sharp gains; now standing at US$ 113.50/bbl compared US$ 105/bbl at the beginning of April.

Bloomberg quotes a Brent price of US$ 115.71/bbl on June 19, a nine-month intraday peak, and highlights that December 2018 futures of the grade have advanced 4% since the Islamic State in Iraq and the Levant (ISIL) militant group seized Mosul, settling at US$ 98.86/bbl.

Professor Paul Stevens, a fellow at Chatham House, has suggested that these price increases may have more to do with market uncertainty than supply risk. “The oil price shouldn’t be affected that much unless there is a major collapse in Baghdad”, he said.

The reality is that Shia-dominated southern regions of the country, which produced more than 85% of the country’s crude in April, remain unaffected. According to the Financial Times (FT), exports from the south are anticipated to reach 2.8 million bpd in July, a 30-year high.

Ed Morse, Global Head of Commodities Research at Citi further holds that exports from the northern Kurdistan Regional Government (KRG) area currently remain out of harms way, and exports from this region now stand at approximately 120 000 bpd. According to Morse, output from this region has actually improved considerably, and could ironically result in Iraqi production actually increasing significantly this year.

Nevertheless, investment in the region may be compromised as security risks encourage international oil companies to scale back operations. Both ExxonMobil Corp. and BP Plc have begun to remove employees from Iraq.

In light of such developments, the IEA has revised its estimates of capacity expansion to 2019 by 470 000 bpd. However, significantly, revised figures still represent a production increase of 1.28 million bpd.

The Wall Street Journal (WSJ) has suggested that the issue is that the market is dependent on securing the investments in the region necessary to deliver an additional 6 million bpd and suggests that the US must consider adjusting its strategy to ensure energy security.

According to the WSJ, the US should look to extend the shale boom for as long as possible, do its utmost to prevent disruption and increase output in other major producing countries (such as Nigeria, Libya, Angola and Kazakhstan), and join with China in an effort to significantly increase the number of vehicles that can run on fuels made from natural gas and coal.

North America would perhaps be wise to invest in such strategies even if supply risk in Iraq has been overstated. The recent Ukraine crisis has highlighted the difficulties that can arise when too much reliance is placed on anticipated supply from a particular region. This threat is particularly pronounced when such dependence is placed on potentially volatile regions such as Russia or Iraq. 

Written by Emma McAleavey.

Read the article online at: https://www.oilfieldtechnology.com/exploration/24062014/iraq_crisis_and_oil_775/