Energy Market Updates

Iraqi Turmoil Rocks the NYMEX

Map of Iraq with factions of the country highlighted

(Image credit: US EIA via Bloomberg Visual Data - Bloomberg Businessweek 6-12-14)

Both Brent and WTI shot up 2% today on last nights news that ISIS insurgents in Iraq captured Tikrit and Baiji, and were continuing their march towards Bahgdad.If you were watching the screen, you also saw ULSD shoot up .085 to 2.9893 and RBOB hit 3.0837, up .0829 on the day in reaction. 

Iraqi production levels have been stable around 3 million barrels per day, making Iraq OPECs second largest producer (behind Saudi Arabia) - so the supply concerns we're seeing push prices up at this intensity level are not unfounded. 

Essentially all of Iraq's oil production comes from the southern, Shia portion of the country by Basra, (see map from Bloomberg above)  where militant influence is essentially non existant (at least in comparison) - so some speculate that even should the Baiji refinery or additional cities fall, actual supply is unlikely to be affected as the area is well guarded and safe. However, it pays to keep in mind that no one saw Mozul or Tikrit being as vulnerable as they apparently were - the invasion of Mozul saw over 500,000 people flee the city in 12 hours, including basically the entire coalition of American-trained Iraqi security forces because of the level of violence and choas that erupted. It's less likely that would happen further south, given the relatively small insurgent force and the steeper odds they would face in terms of fighting back - but its certainly not an entirely unreasonable fear. 

The Obama administration has stated they are "considering all options" - air strikes, drones, etc but have not made a decision at this time. It would seem unlikely that an attempt to garner public support for re-entrance to Iraq would be an easy (or possible) task, all things considered. Ironically, the air strikes on Syria that  the administration faced such backlash for last year were directed at stopping the violence in the area that involved ISIS - the same group now surging in Iraq. Not a good sign for approval for Iraqi strikes. Thus far neither the UN or US has said they will step in to aid the Iraqi government - a fact that it certainly not easing concerns in the market, one would think.

In the grand scheme, considering price volatility and levels as a whole, we're fortunate that some areas (like the US) have seen production booms that have offset some of the drop offs from OPEC nations (mainly Libya) as its helped keep prices overall more stable - the jump in 2012 for example would probably have shot way past a 2% spike. If supply gets disrupted in Iraq though, given its the second largest OPEC producer, that may cease to be the case, which is probably the more far reaching concern pushing prices than isolated fighting would on its own. 

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BREAKING - Iraq Escalates - Militants Seize Tikrit, Target Baiji Oil Refinery

Map of Iraq

(Image credit: Wikimedia Commons 18:57 June 11 2014)

CNN is reporting that ISIS (the Al Qaeda breakoff group that seized Mozul, Iraq yesterday) has gained "nearly complete control of the Northern city of Tikrit" - Parts of the town of Baiji have reportedly been seized as well - this is the site of the largest oil refinery in Iraw. At the moment the Baiji Oil Refinery is reportedly still under Iraqi military control but seizure of the town raises both international relations issues and supply concerns. If militants seize the refinery expect to see chaos in the markets.

You can follow the story in depth  on Reuters here: http://www.reuters.com/article/2014/06/11/us-iraq-security-idUSKBN0EM11U20140611 

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OPEC, Iraq, Inventories & Political Upsets Rattle Wall Street & Commodity Prices

Line charts depicting the stock market scattered on a table

First the usual news - US Crude Supplies once again dropped (to 386.9 million) and more importantly perhaps, Cushing levels dropped again as well. Cushing stocks are down 49% since the Keystone's lower leg started moving its supply to Gulf Coast Refineries. WTI has been climbing steadily the past couple days, and some analysts are predicting WTI hits $105 soon. (Hopefully not!) We also saw gasoline and ULSD up between 0.6-0.9% throughout the day with the intraday high for gasoline hitting 3.0021 and ULSD's intraday high hitting 2.9027.

Brent was up as well on production announcements from OPEC, and an Al Qaeda affiliated group's seizure of the city of Mozul in Iraq. OPEC kept their production target the same, despite the growing fighting. The obvious concern with Iraq is that increased fighting will further disrupt supply. Currently, all exports from the country (a little over 3 million barrels per day) have to go by tanker through the Persian Gulf - the main pipeline that runs from Kirkuk to Turkey has been closed since March. The capture of Mozul and the uptick in violence in the area has caused repairs to the pipeline to be suspended completely at this point. Further supply disruptions are basically a 50-50 proposition at this point, which is making the European markets understandably nervous, and pushing Brent prices up. 

In Virginia, House Majority Leader Eric Cantor got blindsided by his Tea Party primary challenger in an upset that literally no one saw coming. Bloomberg News noted today that there is some serious concern among Wall Streeters, as Cantor was generally seen as an ally for them in the Republican party - supporting TARP and the Export-Import Bank, etc. Wall Street appears to be concerned about potential gridlock in Washington going forward if this primary is an indication of how November may shape up, especially given the debt ceiling issue looms large again in March. (Incidentally, gridlock in Washington is probably good news for the rest of us!) At any rate, between the political upset, and the World Bank revising growth expectations down (specifically for the US) stocks drew back, with utility, industrial and financial stocks the most impacted. 

 

 

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