by Kostis Geropoulos*
As fears of a disruption to Iraqi oil output receded after the stunning initial advance by Sunni militant insurgents lost momentum, the price of oil held steady on July 1.
Fadel Gheit, a senior oil and gas analyst at Oppenheimer in New York, told New Europe in an interview the reason that oil prices did not move up sharply with the Iraq news is because oil prices are inflated already. They already reflect potential disruption. "They are reflecting the current global tension with Russia, East Ukraine, Crimea, the same situation in Algeria, the Libyan situation is not normal and then finally the Iraqi situation,” Gheit said.
On July 1, Benchmark US crude for August delivery fell 3 cents to close at $105.34 a barrel in New York. It is the fourth day in a row of declines and the sixth decline in the last seven trading days. The contract closed at a 10-month high of $107.26 on June 20.Brent crude, a benchmark for international oils used by many US refineries, fell 7 cents to close at $112.29 a barrel in London.
The price of oil rose in recent weeks as investors worried that the surge of violence in the oil-rich country would strain crude supplies but markets grew accustomed tonews reports of violence in Iraqand the country remains the second biggest producer and exporter in the Organization of the Petroleum Exporting Countries (OPEC). Around 90% of Iraq’s oil shipments are from its south, an area so far largely unaffected by unrest.
"The market has already concluded that since all or most of the oil production is from the southern part which is mostly Shiite it becomes very difficult for the Sunni terrorists to really penetrate the Shiite stronghold in the south and block or disrupt oil flows,” Gheit said. "Oil traders are putting very, very small premium to reflect any potential supply disruption in the southern part of Iraq, he added.
Following recent reports, it appears the tide has shifted now and the government forces are beginning to strengthen their position and push out these terrorists, he said, adding that it doesn’t look like oil prices can go up significantly from here unless there is physical threat and disruption in oil flow from Basra.
Gheit predicted that oil prices will continue to be more supply-concern driven than demand-growth driven.
Saudi Arabia promises help in Iraq
Meanwhile, Saudi King Abdullah and US Secretary of State John Kerry on June 27 discussed global oil supplies during a meeting seeking a solution to the Iraqi crisis with the latter reportedly referring to recent comments by a Saudi oil official that the world’s largest oil producer would increase supplies if crises in Iraq orSyriadisrupted supplies.
Riyadh has made it very clear that it is not interested in seeing oil prices go out of control, Gheit said. "They have learned from past cycles that when oil prices get out of control on the upside there is a correction that follows that and that will create the jitters in the market and that is not helpful to the global economy or to Saudi Arabia standing as a reliable supplier, a stabiliser of the crude markets around the world,” he said.
"The only problem or the dilemma we have here in the US is basically we are flip-flopping between our position in Syria and our position in Iraq. On one hand we want to arm the opposition to the Syrian government, on the other hand we want to basically support the government troops against the opposition in Iraq so there is no clear strategy here,” Gheit added.
Iran jumps in
The US has found an unexpected ally in Iran when dealing with the situation in Iraq. Tehran has major interests in Iraq.
"The Iranians are predominantly Shiite Muslim and the second largest Shiite population outside Iran is in Iraq so they do not want to see history repeat itself and you get Sunnis - whether they are from the army or whatever - basically control Iraq and discriminate again against the Shiite as Saddam Hussein did,” Gheit explained. However, the Iranians are supporting the Syrian government. "So we see ourselves in opposite sides in Syria but on the same side in Iraq,” Gheit said.
The reopening of a port inLibyaand an easing of tensions over the Ukraine crisis also weighed on oil. "You have to remember that Libya is capable of exporting over 1 million barrels per day that mostly goes to Europe and that definitely can change the equation significantly,” Gheit told New Europe. "If we can put the situation aside in the next three-six months I think oil prices should go down and should go down sharply. I do not see any justification for 100-dollar oil,” he added.
*Energy & Russian Affairs Editor of "New Europe" newspaper
(source: New Europe 1 July, 2014
