Iraq holds the key in crude oil market

Oil markets have always been the favourite of momentum traders as they are always tensed with the state of affairs in the oil producing nations which contribute to a third of world supplies. Also, geo-political tensions, seasonal demand, supply outages, refinery maintenance and turnarounds are the key factors determining the price trajectory.

This year has been full of events for oil as prices have been trading in a positive range after bottoming out at $91. It all started with the US, which was affected by freezing temperatures at the start of the year leading to record consumption of natural gas. This, in turn, led to shortage of heating fuels prompting utilities to turn towards fuel oil for electricity generation. A rally in US equities and unemployment rate falling to five-year low led to surge in crude oil prices. On the flip side, geo-political tensions in Ukraine, unrest in Libya and production disturbances in south Sudan supported Brent crude.

Prices rose on concerns over the possibility of tougher sanctions on Russia and potential supply disruptions. In addition, positive US economic data, stronger US gasoline demand and continued tight supplies at Cushing, Oklahoma, led to the price surge. Also, data from China suggested that banks disbursed the highest amount of loan in last four years and oil imports by China were at record highs in the first few months of the year. This, coupled with strong world oil demand forecasts in 2014 by the International Energy Agency, has been the driving factor for oil prices. Half of 2014 is almost over and its time we assess the state of oil markets (Iraq situation) and the way going forward.

Iraq borders Turkey to the north, Iran to the east, Kuwait to the south-east, Saudi Arabia to the south, Jordan to the south-west, and Syria to the west. The country with such strategic importance has been in a state of sectarian war between Sunnis and Shias for a long time. Iraq, the second largest crude supplier in oil cartel Organisation of Petroleum Exporting Countries producing around 3.3 million barrels on an average, has been in a state of civil war creating supply constraints in oil markets. The militants have also taken control of the country’s biggest oil refinery (Bajji oil refinery). The refinery which is now shut down is critical for Iraq’s supplies of petrol and other petroleum products. It supplies a quarter of the country’s refining capacity.

Oil markets will closely watch how the events unfold in Iraq. If militants take control of the southern Iraq where major oil fields and infrastructures are located it would be nightmare for the country’s government and an uncertain situation leading to supply imbalance in turn higher crude prices.

WTI crude prices can now head towards $114/barrel ( current market price $106/bbl). On the MCX, crude prices can head towards ₹6,560/barrel.