Knock-on effects raise long-term uncertainty of crude production growth
The global oil market is cautiously looking on the unfolding security crisis in Iraq as Brent crude prices peaked above $114 a barrel for the first time in nine months.
Crude prices leaped nearly $3 a barrel on 14 June as news escalated quickly of Islamic State in Iraq and the Levant (Isis) expanding its presence in northern Iraq. At the close of trading on 16 June, Brent was trading at about $113 a barrel.
Although Iraqs main production centre in the south remains secure, there is a possibility that militants will seeks to damage pipelines and other oil assets.
An increased risk of supply outages in Iraq comes against backdrop of an already tight global demand/supply balance that has markets already on edge, says James Webster, senior director at consultancy IHS energy.
IHS estimates Opecs current spare capacity at about 3 million barrels a day (b/d) as swing producers Saudi Arabia, Kuwait and the UAE produce at high levels to offset 3.5 million b/d of capacity offline, but says this is at the lower end of the comfort zone.
Given expected high Saudi Arabian production this summer, any additional outage could take the tight summer market and push prices sharply higher, says Webster. Further increases in global oil prices could spur discussions of releasing oil from strategic reserves.
Jason Tuvey, Middle East economist at research consultancy Capital Economics, says any disruption in Iraq can be contained by the global oil market.
In the event that there were any disruptions to Iraqi oil production, Saudi Arabia, in its role as the marginal producer, would probably step in, says Tuvey. Saudi Arabia has spare oil production capacity of almost 3 million b/d, which could almost fully offset all of Iraqs oil production.
Ratings agency Fitch agreed that Isis attacks were, at present, no physical threat to Iraqs oil production in the south or its oil fields around Kirkuk in the northeast, but considered knock-on effects of the conflict.
If the conflict spreads and the market begins to doubt whether Iraq can increase output in line with forecasts there could be a sharp rise in world oil prices because Iraqi oil production expansion is a major contributor to the long-term growth of global oil output, said Alex Griffiths, head of natural resources and commodities at Fitch.
However, attacks by Islamist groups have already affected key oil infrastructure in Iraq. Exports from the northern oil hub of Kirkuk have ground to a halt after insurgents damaged the 400,000 b/d pipeline linking Kirkuk to the port of Ceyhan, Turkey, in March.
Iraqs oil ministry reported zero exports from Kirkuk in April and May, compared with an average of 260,000 b/d in 2013.