The Frankfurt Stock Exchange

As the situation in Iraq develops, oil market bulls and bears battle over the degree to which the worst sectarian violence since US troop withdrawal will exert upward price pressure. The bear case states the lion’s share of Iraqi oil output and exports originate in the country’s Shiia-controlled south, where it is more difficult for Suuni insurgent fighters to penetrate and operate.

However, there is also a compelling bullish argument that says the oil market expected incremental Iraqi supply in H2 2014 from export capacity expansions that now look questionable. Additionally, Iraqi oil production decreased 25% during the most recent insurgent uprising which occurred at a time when US military forces were still heavily active in the country. ExxonMobil and BP have evacuated some staff from the south, but production does not appear to be impacted.

Baiji North Refinery Complex

A satellite view shows smoke billowing from the Baiji North refinery complex on June 18, 2014 in Baiji, about 130 miles north of Baghdad.

There are also power generation and oil product supply concerns associated with recent fighting at the Baiji refinery last week. Electric power disruptions could also impact oil production and export operations reliant on steady power supply. An industry source told Breaking Energy that given these factors, up to 1.15 million barrels per day could be “missing” from the global oil market in H2. While that supply shortage could conceivably be addressed by the Saudis – and to a lesser extent Iran – increasing output to such an extent would be a challenge and the market would be left with almost zero spare capacity, a bullish dynamic in and of itself.

“Iraq’s target of producing 5 million barrels of crude a day by 2020 ‘may be overly optimistic,’ Amrita Sen, chief oil markets analyst at London-based consultant Energy Aspects Ltd., said in a report on June 17. Brent for delivery at the end of this decade will probably advance because current price levels need ‘a lot of incremental oil supply from Iraq, while all the current dynamics suggest that the flood may just be a trickle,’ said Sen.” – Bloomberg

Oil futures prices were down slightly in morning trading. Keep reading Breaking Energy and following our social media networks for updates on the Iraq Situation.