Intensifying Iraqi turmoil poses another threat to supply in tight global oil market

IHS Energy experts say oil markets have turned their attention squarely to Iraq and the fast-moving attacks of the Islamic State in Iraq and Syria (ISIS). The impact on global supply chains has yet to be measured.

Global oil prices have increased by several dollars per barrel in the past few days, with Brent front-month futures rising above $114 in intra-day trading late last week. Prices will remain elevated during this crisis, all else equal.

So far, the ISIS offensive has been largely confined to the north and west of Iraq—still some distance away from the epicenter of the country’s oil production in the south.
Derik Andreoli, Ph.D.c., a senior analyst at Mercator International LLC, says time will tell how this spells out for supply chain managers.

“It all depends on how long the prices remain elevated,” he says. “But in general, elevated oil prices push through to elevated bunker prices.”

The increasing potential for supply outages in Iraq comes against a backdrop of an already tight global market,” says IHS.  OPEC spare capacity is currently at the lower end of the market’s comfort zone of 2.5- to 4.5 million barrels per day (mbd) as market balancers Saudi Arabia, Kuwait, and the United Arab Emirates continue producing at high levels in part to offset some 3.5 mbd of supply offline globally.

The global balance is expected to tighten this summer as demand picks up seasonally.
Energy analysts say further global oil price increases could spur discussions of releasing oil from strategic reserves. New supply outages in Iraq would likely push global oil prices higher still—possibly toward $120, a level that could trigger discussions among consuming countries of tapping strategic stocks.