Oil Break Out: All Eyes On Iraq

We anticipate additional gains for Brent crude prices in the coming weeks. The advance of ISIS across major Iraqi cities is pushing Brent prices higher as the geopolitical risk premium is getting priced in. So far there has been no disruption to Iraq's major source of exports from the southern fields, which remain well protected. However, we certainly cannot discount further upside for Brent if ISIS makes more territorial gains into oil producing areas of Iraq.

The technical picture suggests that prices could rise sharply should oil supply from Iraq come under threat. In pushing above USD111/bbl on June 12, front-month Brent crude has broken up out of the contracting range it has been trading in for three years. USD120/bbl would look very achievable in the event of a strong close to the week. The trigger for this move would an escalation on the ground with ISIS taking direct control of territories with major oil fields.

While we did not anticipate the severe destabilisation that has taken place in northern Iraq, we have previously highlighted Iraqi political and security issues as a key upside risk to 2014 prices on both a geopolitical and supply level ( see "Production Challenges Will Keep Brent Above US$100", 8 January). Our core scenario for 2014 is that disappointing supply will keep Brent crude prices elevated through the remainder of the year. We recently revised up our 2014 average Brent forecast to USD108/bbl from USD105/bbl and above market consensus of USD106/bbl ( see 'Supply Issues Weigh Heavy On 2014 Forecast', May 30). This escalation and deterioration in the situation on the ground in Iraq will pose a strong upside risk to our forecast if the geopolitical premium persists.

Break Out
Front-Month Brent Crude, USD/bbl (Weekly Chart)

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This article is tagged to:
Sector: Oil & Gas, Commodities
Geography: Global, Iraq

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