No Immediate Threat To Oil Supply

BMI View: We see no immediate threat to Iraqi oil supplies from attacks by the Islamist militant group ISIS, and we maintain our Brent forecast of USD108/bbl for 2014. We do not expect major gains for ISIS in the oil-producing south, as government support is much stronger and the willingness of military forces to defend the region is significantly higher.

We see no immediate threat to Iraqi oil supplies despite the takeover by the radical jihadist group the Islamic State of Iraq and the Levant (ISIS) of much of the country's north. ISIS claimed on June 12 that it will target the capital Baghdad and the sacred Shi'a cities of Karbala, and Najaf in the south. However, the insurgents are highly unlikely to take over southern Iraq, from where all of Iraq's oil is currently exported.

The majority Shi'a Iraqi army was ineffective and reportedly unwilling to defend majority Sunni northern Iraq from ISIS. However, much of its 930,000-strong security forces, including battalions trained for urban warfare, are stationed in Baghdad and southern Iraq, and their willingness to defend the majority Shi'a south will be higher. Popular support for the Iraqi state is also stronger in the south; thousands of Iraqis reportedly volunteered to defend Baghdad against ISIS, and Shi'a militiamen are establishing a battle line 60 to 70 miles north of the capital. At the same time, demography is beginning to count against the insurgents as they enter mixed provinces such as Diyala, and the risk of overstretching will diminish ISIS's ability to undertake a large-scale offensive in the south.

ISIS Unlikely To Take Over South
Iraq - Map of Key Oil Infrastructure

No Immediate Threat To Oil Supply

BMI View: We see no immediate threat to Iraqi oil supplies from attacks by the Islamist militant group ISIS, and we maintain our Brent forecast of USD108/bbl for 2014. We do not expect major gains for ISIS in the oil-producing south, as government support is much stronger and the willingness of military forces to defend the region is significantly higher.

We see no immediate threat to Iraqi oil supplies despite the takeover by the radical jihadist group the Islamic State of Iraq and the Levant (ISIS) of much of the country's north. ISIS claimed on June 12 that it will target the capital Baghdad and the sacred Shi'a cities of Karbala, and Najaf in the south. However, the insurgents are highly unlikely to take over southern Iraq, from where all of Iraq's oil is currently exported.

ISIS Unlikely To Take Over South
Iraq - Map of Key Oil Infrastructure

The majority Shi'a Iraqi army was ineffective and reportedly unwilling to defend majority Sunni northern Iraq from ISIS. However, much of its 930,000-strong security forces, including battalions trained for urban warfare, are stationed in Baghdad and southern Iraq, and their willingness to defend the majority Shi'a south will be higher. Popular support for the Iraqi state is also stronger in the south; thousands of Iraqis reportedly volunteered to defend Baghdad against ISIS, and Shi'a militiamen are establishing a battle line 60 to 70 miles north of the capital. At the same time, demography is beginning to count against the insurgents as they enter mixed provinces such as Diyala, and the risk of overstretching will diminish ISIS's ability to undertake a large-scale offensive in the south.

Finally, the support of Iranian and US forces will prop up the government. Iranian special forces have been deployed across the country, and Tehran declared it will defend Najaf and Karbala at any cost. We also believe that the US will send drones or air carriers to strike rebel positions over the coming weeks ( see 'US Air Strikes Increasingly Likely', June 13).

Impact On Brent

Iraq remains crucial to global oil prices. It is OPEC's second largest producer and currently pumping around 3.3mn barrels per day (b/d). The swift advance of ISIS into Iraq saw Brent peak at USD114.7/bbl on Friday June 13; a 4.2% increase on the trading price prior to the attacks. Subsequently, we have seen some of that geopolitical risk premium subside, though the market is retaining a steady USD3/bbl mark up on prices compared to before instability escalated.

Key Upside Risks From Iraq
Brent Crude Spot Price (USD/bbl)

We see no immediate threat to oil supplies from the southern region, where all of Iraq's oil is currently exported - the Kirkuk-Ceyhan pipeline having been offline since March 2. There has been no disruption to oil production operations in the Shi'a majority southern areas of Iraq, which remain at a distance from the bulk of the fighting. Also, as previously noted, Baghdad and a number of Shi'a holy sites lie ahead of any potential ISIS advance, both of which will remain strongly defended by the police, army and volunteers.

Risks To Outlook

Due the lack of disruption to oil production in the south, we currently maintain our Brent forecast of USD108/bbl for 2014, USD2/bbl above the current Bloomberg consensus forecasts. We will be tracking events in Iraq closely to see how developments unfold over the coming weeks and note two key triggers that would see us move to revise our forecast upwards:

  • Iraq is now entirely dependent of the smooth functioning of the Al Basra oil terminal for all its exports. This creates considerable vulnerability if exports are disrupted, be it by natural causes or targeted attacks. A stoppage at the Basra port, even just temporarily, will cause an immediate and substantial spike in global oil prices.

  • Bombings and "hit and run" attacks by rebel insurgents will likely become more frequent in Baghdad and other cities in southern Iraq over the coming months, as ISIS seeks to further erode the legitimacy of the central government. Any attacks on oil workers would likely result in key personnel being withdrawn from the region. While this would not impact as significantly as disruption to the Basra port, it remains a serious cause for concern over the coming months.

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