After Iraq: what next for oil?

The fighting in Iraq has prompted a 4% jump in Brent crude prices to a nine-month high around $113 a barrel, as fears over a hit to Iraqi oil production have grown.

This week, militants from the Islamic State of Iraq and the Levant (Isis) were fighting government forces for control of northern Iraq’s key oil facility, after making rapid gains across central Iraq in recent weeks. Iraq currently exports approximately 2.5 million barrels per day (mbpd). It is expected to be able to boost production to 4.3mbpd by 2018.

What the commentators said

Don’t expect a massive spike in the oil price, said Bank of America Merrill Lynch. “The immediate risks to production seem limited.” Most of Iraq’s oil fields are in the south of the country, a long way from the scene of the fighting.

What’s more, added Morgan Stanley, the south is a Shia stronghold that is better fortified. Iran is also going to send reinforcements. Still, while the premium on near-term oil futures should now fade, long-dated oil is likely to remain elevated.

The worry is that Iraq could eventually end up like Libya, said Liam Denning in The Wall Street Journal. In that kind of civil war-torn environment, developing Iraq’s oil reserves would be a tall order.

Look what happened to Libyan production. It has oscillated between zero and 1.75mbpd. Before the war it was supposed to reach 2mbpd by 2015. It’ll be lucky to get there by 2019.

So the danger in the next few years is higher oil prices dampening global growth further. World output growth has been “sluggish” ever since oil exceeded $100 a barrel, as Capital Economics pointed out, “and activity has tended to slow sharply once the oil price tops $120”.

That looks like the “danger point” for a world economy still struggling to overcome the hangover from the global financial crisis.

Merryn

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