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Page added on June 17, 2014
Iraq Foretells Oil’s Dystopian Future
When things go down in the Middle East, oil prices go up. Even axioms have their nuances though.
Amid what may be the unraveling of Iraq, oil prices have characteristically risen, with Brent crude breaking back above $112 a barrel.
Yet Iraq’s real significance for oil may have less to do with what transpires this summer and more over the rest of this decade. The direct threat to the country’s oil exports is actually not yet acute. For now, the insurgency is focused in central Iraq, away from the main oil producing and exporting areas in the south and the largely Kurdish-controlled north.
The bigger issue is what the sudden advance of the Islamic State of Iraq and al-Sham means for Iraq’s oil-production growth prospects.
In its latest medium-term forecast, released Tuesday, the International Energy Agency trimmed its supply growth outlook for Iraq. It now expects it to be able to produce 4.29 million barrels a day by 2018, almost half a million barrels a day less than last year’s forecast.
Despite that, Iraq still accounts for 61% of expected growth in production capacity controlled by the Organization of the Petroleum Exporting Countries. So even if the near-term threat to oil supply from ISIS isn’t catastrophic, the wider context potentially is.
Iraq’s borders now look more like dotted lines, potentially portending a situation like Libya’s, where rival regional groups vie for power or separation with a weak central government.
In Libya, that instability has caused production to yo-yo between virtually zero and about 1.75 million barrels a day in recent years. Now, it is back down to about a quarter of a million barrels a day. In 2010, before Libya blew up, the IEA forecast that country to produce more than two million barrels a day in 2015. Now, it isn’t seen getting anywhere near that even by 2019.
In Iraq’s case, even if Baghdad doesn’t fall, ISIS may establish itself in a large swath of the country, remaining a force for instability. Worse, Iraq is now an arena for wider rivalries between Sunni and Shia Muslims backed by their regional patrons, Saudi Arabia and Iran.
Such instability means even the IEA’s reduced forecasts look questionable, as the investment needed to develop Iraq’s oil could be deterred or blocked outright.
That is bullish for longer-dated oil prices. Yet these haven’t reacted as much as near-term prices, suggesting gains to be made. For example, whereas average Brent prices for the rest of 2014 have risen by 3.3% in the past week, average 2018 prices are up by less than 1%. Moreover, those 2018 prices are roughly where they were at the end of 2010 just before Libya blew up—yet this crisis could be potentially much worse.
As longer-dated oil prices rise on intensifying instability in the Middle East—the center of the conventional oil industry—this should benefit companies operating in unconventional areas. Chief among these are North American exploration and production firms developing shale resources and the like.
The IEA forecasts global oil demand to rise by 6.58 million barrels a day by 2018, of which 61% is to be met by extra North American supply. That actually represents a slowdown in production growth. But if Iraqi growth slows sharply, that would raise oil prices and likely spur even greater investment in North American production. E&P firms rely on the futures market to lock in prices, providing certainty on cash flow to underpin drilling. So any rise in longer-dated oil futures would reinforce this.
Ultimately, though, all this is bearish for oil in the longer term. Iraq joins a litany of countries like Libya, Nigeria and Venezuela—all OPEC members—that cannot necessarily be relied upon as stable suppliers.
The high oil prices and geopolitical shocks that ensue are slowly but surely pushing oil-consuming countries to redouble efforts to reduce demand. They are also raising the energy burden on consumers in vulnerable regions such as the euro zone, slowing economic growth that underpins the oil market’s continued health.
The periodic conflagrations of the Middle East, so often lighting a fire under oil markets, eventually will burn them down.
16 Comments on "Iraq Foretells Oil’s Dystopian Future"
J-Gav on Tue, 17th Jun 2014 5:19 pm
Fairly incendiary article by WSJ standards. “Bearish in the longer term” keeps it all tidy for the moment though, except for those who understand that the “longer term” nowadays is measured in a few years rather than decades. The rest is pure literature and don’t mean jack.
noobtube on Tue, 17th Jun 2014 6:11 pm
Reading this article, I thought it would have been from RT, Al-Jazeera, or some other alternative news source.
It was actually kind of informative.
Some sane person actually got through the filters of the insane American-run media.
Pops on Tue, 17th Jun 2014 6:45 pm
of course futures down the road aren’t much higher, we’ve been hearing for years now that there is a glut about to wash over us at any moment.
DMyers on Tue, 17th Jun 2014 8:32 pm
“The IEA forecasts global oil demand to rise by 6.58 million barrels a day by 2018, of which 61% is to be met by extra North American supply.” [quoted from the article]
A statement like that scares the shit out of me. Plans and projections for our future are being made based on the myth of North American supply, as in shale. They want to believe it so badly, they fashion our future as though it’s a sure thing.
Growing demand continues to 2018. That has to assume BAU continuing. But no problem, we’ve got it covered with that great big bunch of oil in America. Even if it’s less than a 100 years worth, it can’t be less than 50.
Makati1 on Tue, 17th Jun 2014 11:46 pm
DMyers, you see it correctly. More BS to keep the game going a bit longer. The cost is going to being the end of oil, not lack of oil underground.
Makati1 on Wed, 18th Jun 2014 1:03 am
BTW: “…The Islamic State of Iraq and Syria (ISIS), now threatening Baghdad, was funded for years by wealthy donors in Kuwait, Qatar, and Saudi Arabia, three U.S. allies that have dual agendas in the war on terror…”
http://www.thedailybeast.com/articles/2014/06/14/america-s-allies-are-funding-isis.html
“…Now, however, ISIS, a Sunni jihadist force nurtured and armed by Washington and its Sunni Gulf allies (Saudi Arabia, Qatar) as a proxy force to overthrow President Bashar al-Assad in Syria, is threatening to topple Washington’s Shia sectarian puppet regime, headed by Prime Minister Nouri al-Maliki, in Iraq. In the face of a debacle without precedent since the defeat of US forces in Vietnam 34 years ago, the US is turning to yesterday’s “Axis of Evil” bogeyman, Shia-led Iran…Despite the Pentagon disclaimer, the fact that the United States is publicly asking for Iran’s help is a measure of the desperation of American policy makers …”
http://www.globalresearch.ca/washington-seeks-alliance-with-tehran-as-civil-war-in-iraq-intensifies/5387403
Live by the sword, die by the sword…
Davy, Hermann, MO on Wed, 18th Jun 2014 6:02 am
Funny how Mak will bitch about the ministry of propaganda when it does not match his world view but he picks and chooses the articles from the same MSM propaganda when it support his views. They call that hypocrisy where I am from. You are nothing more than a propaganda shill Mak. Pretty apparent that both sides in the ME have engaged in questionable practices Mak. Yes, Mak, the US is doing the typical meddling in the region and many times with poor methods and choices. But, Mak, you have to pay to play. The US is learning from its past mistakes and being very practical with its overtures to Iran and the Shia’s.
steveo on Wed, 18th Jun 2014 7:13 am
“a Sunni jihadist force nurtured and armed by Washington”
You would think our experience with the mujahideen in Afghanistan would have taught our “leaders” about arming Islamist militants.
Davy, Hermann, MO on Wed, 18th Jun 2014 8:57 am
Steve, you know our leaders can’t think past the next election.
J-Gav on Wed, 18th Jun 2014 10:53 am
Steveo – They could be forgiven for having understood nothing about Thucydides’ “History of the Pelopponesian War.” But the failure to learn anything from even the most recent disasterous interventions in the Middle East smacks of head-banging stupidity.
edboyle on Wed, 18th Jun 2014 12:52 pm
What about an ISIS regime in Baghdad consolidating power and then taking Kuwait, moving on Damascus, Lebanon, Jordan and then the gulf states or just threatening the corrupt Sheikdoms with blowing up their wells. I mean these people could be crazy. They sell oil and earn money, blackmailing the west and destabilize the whole area, with their ideology, like Soviets or Qaddafi or Iran did earlier. Infiltration, terror attacks,support of extremist insurgencies in Saudi Arabia. They could kill princes one by one, blow up shopping malls, Burj Khalifa with a terrorist takeover or an airplane attack like 9/11? Will America want to invade again in 2015 or 2016 to put out blazes from Mediterranean to Persian gulf?
This could be our nightmare come true. Like Boko Haram or Taliban saying modern life is evil and should be stopped and doing what they say by blowing up gulf oil flow. forget geology and investment flows and prices then. Then Russia and USA will be good friends and Iran and China too If only to stabilize the madness.
Davey on Wed, 18th Jun 2014 2:25 pm
Ed, they don’t have enough ass to pull that off. Too much counterbalance, too much outside intervention potential, and not enough state support. The KSA is not offering the kind of support to allow that. Air power is needed, heavy armor, and serious logistics. Look what it took the US to pull off its invasion.
Makati1 on Wed, 18th Jun 2014 8:59 pm
ed, if you hadn’t noticed, Russia, China and Iran are already good friends. The US will never be friends with any of the 3 because they know that the 3 are trying to take down the USD. Iran has all the oil it needs. Ditto Russia. China is buying from both. They don’t NEED anything from the US.
Davy, Hermann, MO on Wed, 18th Jun 2014 9:04 pm
Try food Mak, and capex from a diversified economy. Last I seen China buys allot of food from the US.
Makati1 on Thu, 19th Jun 2014 12:49 am
“As of 2013 EU – Chinese trade makes the EU the largest trading partner of China and China the second largest trading partner of the EU.” Wiki.
The world has more sources of food than the US and the Chinese are already sourcing them. Food cannot be a club any more than oil. Both go to the highest bidder, not the ‘politically correct’. The US imports ~20% of it’s food because it cannot grow it in the 50 states. Most of it’s fruits and veggies ‘off-season’ and things like coffee and chocolate all the time. And when the mid-west dries up into a dust bowl, as it is currently dong again, I don’t think the US will be exporting to anyone. If anything, it will be importing even more … if it can. But who wants Charmin dollars when gold is offered by China? Answer: No one.
Davy, Hermann, MO on Thu, 19th Jun 2014 5:35 am
Mak, the US import 20% of the food it doesn’t have to have but buys because it is rich and has powerful Agribusinesses importing it with a market for it. Your talk of the Midwest dustbowl is a preemie mak. I live in the southern Midwest and things are just fine here. Plenty of rain. Sure that may change and is changing in Western Kansas but the heart of the Midwest is fine. Mak, do your googling the US is one of the top exporter of the basics of the food chain corn, soy, wheat, rice, and many others. The dollar is the reserve currency and much safer than the politically controlled Yuan that does not float. You talk up this currency but it is suspect like everything else in China. I am reading constantly now about the revelations that it is ugly under the surface in China. A China in a collateral crisis and debt unwind. Your Chinese gold bragging is suspect too. There is talk of gold bars in China being gold plated. Your 10,000 tons is pure speculation and probably an extreme exaggeration.
Mak, more of your half-truths and distortions. The US is the EU largest trading partner. Please quit delivering false data to this board for your personal gain. I am get sick of your bashing the US unfairly. Please Mak have the decency of presenting a level playing field without distortions, speculations, and half-truths.
http://en.wikipedia.org/wiki/List_of_the_largest_trading_partners_of_the_European_Union