The rapid advance of jihadists through large swathes of Iraq raises concerns in the oil market about the ability of the Organization of the Petroleum Exporting Countries (OPEC) to meet global demand, industry experts say.
Analysts estimate that the cartel needs to ramp up production by at least 700,000 million barrels per day (bpd) in the second half of the year to meet global demand, and their hopes are partly based on increased output from Iraqi oil wells.
“If this hope is not realized, there is a problem,” said Ehsan Ul—Haq, an analyst at the British energy consultancy KBC, pointing out that OPEC members Libya, Nigeria and Iran are already producing less than they could because of unrest and sanctions.
In the longer term, 60 per cent of growth in OPEC’s production capacity is expected to come from Iraq, the International Energy Agency in Paris estimated Friday.
The European benchmark price for Brent oil from the North Sea shot up to a 9—month high of 114.5 dollars per barrel early on Friday morning, before retreating below 113 dollars later in the day.
Iraq pumped 3.33 million bpd last month, making it the second—largest OPEC producer after Saudi Arabia.
Oil from the north of the country stopped reaching markets in March, following violence in Anbar province and an attack on a pipeline to Turkey.
However, 90 per cent of Iraq’s oil comes from the south of the country, and it is unlikely that the Sunni jihadists of the Islamic State of Iraq and the Levant (ISIL) would be able to take over the south, which is populated by Shiite Muslims, analysts say.
“It doesn’t look like all of Iraq’s production will be down, but even if there is only a partial outage, it would create problems,” Ul-Haq said.
Prices would continue to rise if ISIL advances further towards the capital Baghdad, from where the country’s oil industry is controlled, experts said.
In addition, planned expansion of production in the south would be put at risk if international oil firms withdrew staff for security reasons or postponed investments.
“The questions for them are: Who is in power? With whom can we make contracts? Does Iraq still control its infrastructure?” said Alexander Poegl at JBC Energy in Vienna.
On Wednesday, OPEC’s oil ministers gathered at their Vienna headquarters and declared that they would not raise their official production ceiling because oil supply and demand are in balance.
“How many times did I already tell you, I am very happy with the market,” an exasperated Saudi Petroleum Minister Ali Naimi told reporters after having been repeatedly asked about Western demands for higher output.
OPEC said after the meeting that its members would, if required, take steps to make sure the market remained balanced.
A further escalation of the situation in Iraq and production outages in the south would drive oil prices up by 0 dollars, analysts at Commerzbank in Frankfurt said.