The Investor SA

30 April, 2014

Werne van der Merwe

 

-ISIS puts global oil prices under immense pressure-

 

Baiji, Iraq's biggest oil refinery, just  north  of  Baghdad,  was   taken

control of by ISIS  (The Islamic State of Iraq an Syria)  even  though

Iran's  President, Hassan  Rouhani, gave  confirmation  that   'shiite'

religious sites in Iraq will be protected from Surri extremist groups by

his nation.

 

After extreme heavy  fighting, government  troops  defending the oil

refinery  were  beaten  back  as  ISIS  took  control over the refinery.

Since the refinery was in militant hands, oil prices shot  up  by  0.5%,

settling down  on  $106.58 per  barrel. Baiji  is the largest  source of

fuel for Iraq's  domestic  consumption, and  for this vital asset to fall

into ISIS's control, the fear that this will effect  fuel supply within  the

region  and  create  shortages  for the  country, has been  dramatic.

Baiji  oil  refinery  being  in  ISIS's  militant hands  did not just  cause

headaches and fears for Iraq and  the  regions  reliant  on  this  fuel

source,  but  global  oil  prices  spiked  as  the  militants  forced  the

refinery to shut down.

 

After  capturing  the  city  of  Baiji,  the  risk  began  to  grew that key

energy infrastructure in the south  would  be  targeted  by  ISIS  and

other militant groups. Iraq's  OPEC's  (Organisation of  Petroleum of

Exporting  Countries)  second  largest  producer  received  a   grave

threat to their oil production by  ISIS. A  threat  which  came  true  in

only a matter of days, letting prices of Brent Crude jump by more than $4 a barrel.

 

For  six  months  OPEC  kept  its  production  target  of  30  million  barrels  per  day  unchanged, as reported in a recent meeting held by the company. Any  interruptions  in  Iraq's  production  meant  that  there  will  be  implications  for world markets  and  especially OPEC. The EIU (Economist Intelligence Unit) said a sustained oil price shock is not expected, although the risk of an impact on physical  supplies  is  growing. There is no ament danger to Iraq's production, as the main majority of their oil fields are in the south of the country.

 

There  was  some  mixed  production results coming from OPEC's middle-east region in 2014, as production from marginal exporters such as Libya and Algeria, where  somewhat  disappointing. Major producers such as Saudi-Arabia, Iran and Iraq, delivered somewhat better news as they production output kept going up. To ensure oil markets are well-supplied globally, major producers ,such as Saudi-Arabia, will surely find it necessary to raise production, with or without  interruptions  to  Iraq's production. Although, there  is  still  being a healthy picture painted for global oil supply, as the U.S are  currently  leading  global  oil  market  growth  outside  of  OPEC. But  if  current  conditions  in  Iraq  keep  on deteriorating, and investors keep  on  pushing  oil  prices  higher  and  higher, there  is a risk that the forecast will be raised and oil production will grow by 2.6%, leaving Brent Crude to average $107.47 per barrel.