Analysis: Iraq conflict gives a jolt to oil prices

Oman crude oil on the Dubai Mercantile Exchange last month reached levels not achieved since last September on renewed tensions in Iraq and the potential threat to oil production.

The DME August-delivery Oman crude contract settled at US$109.44 per barrel, up $2.98 from the closing May price of $106.46 when the July contract settled. The monthly average of the DME, which is used by Oman and Dubai to set their official selling price, was $108.08 a barrel, up from $105.65 in May and also the highest since September. The $2.43 a barrel increase was the largest monthly rise since August, as crude oil prices finally broke out of the narrow trading ranges that had characterised the market this year.

The Oman contract peaked at a high of $111.18 a barrel on June 23 as conflict in Iraq raged, but so far the main crude production and export facilities in southern Iraq remain unaffected, and prices have eased slightly to just below $110 a barrel. The turmoil continues, though, and dominates the headlines for oil markets.

Société Générale warned that the oil price could spike to $150 a barrel, albeit briefly, if the conflict in Iraq hits operations in the country’s major southern fields – noting that this could affect up to 2.6 million barrels per day (bpd) of Iraqi oil exports.

A disruption of this scale would likely spark a release of strategic oil reserves by member states of the International Energy Agency, however, and other producers, such as Saudi Arabia, would be able to step up exports.

Early indications suggest that there has been some disruption to Iraqi exports and a Bloomberg survey noted that Iraqi production had tumbled 400,000 bpd to below 3 million bpd by late June, the lowest level since September.

The other main price driver for oil during the second quarter has been the political crisis in Ukraine, and while skirmishes continue, there has been no serious threat to Russian oil and gas supplies.

While outright oil prices rallied sharply, the physical crude market in the Middle East had a more measured reaction as sluggish demand from Asian refineries, suffering from poor profit margins, kept a lid on things.

Prices of refined products have generally failed to keep pace with crude oil, so weaker refining margins are likely to reduce the appetite among buyers and may lead to reductions in refinery runs, noted analysts.

According to figures from Reuters, crude from Abu Dhabi, Oman, Qatar and Bahrain, to load in August, has been sold at lower differentials than the previous month, reflecting the general lacklustre demand from Asia. However, fears of a supply disruption from Iraq was enough for Middle East exporters to find buyers for most of the August exports by the end of June.

Some market watchers have said that refiners may steer clear of Iraqi crude while the current turmoil continues, which in turn will increase demand for rival grades in the Arabian Gulf.

Paul Young is the head of energy products at DME

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