The Iraq insurgency has given oil markets more uncertainty in a time of tight global supplies reports IHS Maritime’s Michael Jones
- 2.08M – crude exports in 2013 from Basrah
- 70% - amount of crude oil production in the south of Iraq
- The insurgency in Iraq has not yet posed a direct threat to southern production and exports
- Crude exports from Basrah continue – for now
Geopolitical risks associated with oil have again been brought into focus with the recent turmoil in Iraq - instability there is nothing new. Now, however, the ISIS militant group (the so-called Islamic State of Iraq and Syria) have made large advances in the northern part of the country capturing cities and moving to within about 70km north of Baghda. There are also threats to oil installations in the north, such as Baiji refinery.
If the conflict does spread, additional Iraqi oil supplies (70% of which are in the south) are not immediately at risk since they are a long way from the current fighting. Since early March, crude from the northern provinces (including the Kurdish areas) was already ‘off the market’ due to attacks on the Kirkuk-Ceyhan pipeline which takes oil to Turkey’s Mediterranean coast and from there by ship to the rest of the world. Northern production according to the International Energy Agency (IEA) had been averaging around 250,000-300,000 bpd in 2013 and early 2014. As the IEA observes, the prospects of the reopening of the Kirkuk-Ceyhan pipeline are more elusive than ever.
The ISIS advances in the north of Iraq, while not imperilling the crude supplies from the south, for now, have created an understandable nervousness in the oil markets and the markets are pricing in the uncertainty. Brent crude, the international benchmark, rose to $113.41/barrel on Friday and West Texas Intermediate (the US standard pricing mechanism) rose to $106.66, both prices represent highs for 2014.
The impact of the ISIS militant groups actions on the oil markets is limited unless oil shipments from Basrah were under threat, a situation that does not seem likely, for now. Similarly, bunker traders have been sanquine about the immediate impact of the actions of ISIS. Unni Einemo of Bunkerworld said so far the bunker traders’, “main concern regarding Iraq is the general impact events there have, and can have, on oil prices and therefore, by extension, on bunker prices.”
“The price of IFO380 in Singapore has increased from an average of $596.50 on June 9 to $614 on June 13 (today),” said Einemo, but she explained a complicating factor in comparing prices between dates such as those is that the “WTI June contract expired in the interim, so the closing price we reported on June 6 and on June 12 reflected June and July contracts respectively…Singapore IFO tends to follow swings in WTI as opposed to the Brent benchmark.”
Iraq sits astride the fifth largest proven crude oil reserves in the world, but modest percentage of proven fields are being worked – there remains much potential to increase output.
IHS Energy sees three key impacts from the developments. First, there could be some Iraqi production at risk. For now, Iraq’s main producing fields in the south will remain secure but militants could seize control of pipelines or other infrastructure links. This is not a high threat at present.
Second, any potential supply outages in Iraq come at a time of an already tight global market.
Third, IHS Energy thinks “further global oil price increases could spur discussions of releasing oil from strategic reserves.” Should prices rise towards $120/barrel, this could start oil consuming nations to begin tapping their strategic stocks.
Oil markets already faced capacity constraints with uncertainty of supplies from Libya, Nigeria and northern Iraq. As IHS Energy says: “An increasing risk of supply outages in Iraq comes against a backdrop of an already tight global demand/supply balance that has markets already on edge. OPEC spare capacity, currently estimated at around 3 mbd, is at the lower end of the market’s comfort zone of 2.5 to 4.5m bpd, as
the market balancers Saudi Arabia, Kuwait, and the United Arab Emirates continue producing at high levels in part to offset some 3.5M bpd of supply offline globally. The global balance is expected to tighten further this summer as the demand picks up seasonally—even as production from North America continues to surge.”
In particular, Saudi Arabia which among the OPEC members has the greatest capacity to increase oil production, may not be able to offset any loss from Iraqi exports.
IHS Energy says, “any additional outage could take the tight summer market and push prices sharply higher. By way of comparison, Iraqi crude exports averaged about 2.6 mbd in May, nearly equal to all of the world’s spare production capacity.”
Iraq is a country divided in oil production terms by its north and south regions. In January, the IEA said the country’s oil production targets (which it missed in 2013) were, “undermined by chronic operational and technical issues as well as a worsening security situation in the central and northern regions of the country, which looks likely to continue in to 2014.”
Despite completion of some upgrades, during all of 2013 the increases in oil production Iraq was actually able to achieve amounted to just a 120 kb/d and aggregate output amounted to 3.07M bpd in 2013 compared to a forecast 3.5M bpd.
Oil exports, north and south fell by 40 kb/d to 2.34M bpd in 2013. The IEA says Basrah exports were up “a modest 10,000 bpd to 2.08M bpd as weather-related delays at southern ports in the Gulf constrained liftings”. Northern exports of Kirkuk via the pipeline and road transport to Ceyhan declined by around 50,000 bpd to 252,000 bpd. The IEA puts this decline down to “repeated attacks on the northern Ceyhan‐Kirkuk pipeline as well as the continued suspension of crude exports from the KRG region…stemming from ongoing payment
and contract disputes between Irbil and Baghdad.
Export facilities in south are lagging behind in their modernisation programmes, too. The IEA reports work at southern ports is still delayed, citing the remaining tasks to be done at the Basrah terminal as well as extensive work still needed on two of the four single point moorings (SPMs). As the IEA says: “Given the formidable scope of the technical, security and political challenges that still need to be overcome, industry analysts expect Iraq to increase crude production by only 200 kb/d to 300 kb/d this year.”
A protracted dispute between Baghdad and the northern Kurdistan Regional Government (KRG) over constitutional issues related to ownership of the oil in the KRGs region and payments to the central government has cut off shipments from the area.
Reports suggesting Iran and the United States may have direct talks on the militant threat in Iraq, represent a major thawing of relationships. The majority of Iranians are Shiite Muslims while ISIS represents Sunnis.
Media reports suggest in the worst case, with Libyan barrels still shut down and a curtailment of Iraq’s southern exports the Saudi Arabia may not be able to pick up the missing barrels. That hasn’t happened yet, so the key impact on world oil markets has been price hikes in crude and refined products, but if there is any hint of southern export curtailment, then the geopolitical world of oil will change (yet again) in unpredictable ways.
This article appeared in IHS Maritime’s Fairplay Magazine, 19 June 2014. For more maritime insight,
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