Oil Market Risks in Iraq Look Limited, for Now

Source: Reuters 6/13/2014, Location: Middle East

The sudden eruption of an al Qaeda-linked militant insurgency in northern Iraq this week triggered the biggest oil price spike in almost a year, as traders feared a civil war that might also draw in oil-rich neighbors.

Yet for the moment, despite a near $5 a barrel rise in Brent crude, analysts and consultants say the immediate threat to Iraq's oil supplies - most of which is hundreds of miles to the south of the fighting - is limited. Northern exports have run at a trickle for months, and few had expected a rapid recovery.

While it is too early to say what impact the violence will have on long-term investment in a country expected to deliver a large portion of the world's future oil supply growth, near-term risks are more contained. Brent crude rallied to a nine-month high of nearly $115 a barrel on Friday, but later pared gains to trade around $113.35.

Southern Iraq is overwhelmingly Shia and loyal to the government in Baghdad of Iraqi Prime Minister Nuri al-Maliki, who will fiercely defend their neighborhoods and the key oil producing and exporting facilities, say analysts.

"The ISIL and its operations have not yet extended and probably will not intrude on the vast Shia-dominated area south of Baghdad," says Wayne White, scholar at Middle East Institute, Washington DC said.

Despite the Sunni Islamic insurgency seeking to topple Maliki, production is set to rise to a record 2.8 million barrels per day by the end of this year, said Ayham Kamel, Middle East and North Africa director for consultancy Eurasia.

Iraq exported 3.17 million bpd of crude oil in May, Reuters data show, of which around 2.6 million bpd came from its southern oilfields. Most of the rest of the oil was exported either from the autonomous area of Iraqi Kurdistan or via trucks and other smaller routes to neighboring countries.

"Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk," the International Energy Agency said in a report.

On 13 June 2014, Iraq's most senior Shi'ite Muslim cleric urged followers to take up arms against a lightning advance by militants from the radical Islamic State of Iraq and the Levant (ISIL), whose fighters were sweeping south toward Baghdad.

The most material focus for markets is the 300,000 bpd Baiji refinery, Iraq's largest, which was surrounded by ISIL fighters on Thursday. It was not clear what impact, if any, this was having on the flow of fuel, but a prolonged outage could force Baghdad to import more gasoline or diesel from the south.

The outbreak has added to doubts over eventually boosting Iraqi crude exports through the country's northern oil pipeline from the Kirkuk area through Turkey to the Mediterranean, which has been shut since March due to sabotage.

That pipeline, which had pumped some 250,000 bpd in the second half of last year, passes through areas now controlled by forces loyal to the militants from the radical Sunni Islamic State of Iraq and the Levant. But few analysts had been counting on its return to operation any time soon.

"Oil and gas infrastructure in ISIL-controlled areas - including the northern crude export route and its downstream assets - will be vulnerable to repeated attack, and the risk of disruptions to domestic product supply is high," said Raad Alkadiri, a former UK government adviser in Iraq and now senior director of upstream research at IHS Energy.

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