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Escalating unrest in Iraq poses another supply threat in a tight global oil market

By Patrick Burnson, Editor
Supply Chain Management Review
June 17, 2014

IHS Energy experts say oil markets have turned their attention to Iraq and the rapid attacks by the Islamic State in Iraq and Syria (ISIS). The impact on global supply chains has yet to be measured.

Global oil prices have risen several dollars a barrel over the past few days, with first-month Brent futures rising above $114 in intraday trading late last week. Prices will remain high during this crisis, all other things being equal.

So far, ISIS’s offensive has been largely confined to northern and western Iraq, still some distance from the epicenter of the country’s oil production in the south.

Derik Andreoli, Ph.D., principal analyst at Mercator International LLC, says time will tell how it goes for supply chain managers.

“It all depends on how long prices stay high,” he says. “But in general, high oil prices translate into high bunker prices.” OPEC spare capacity is currently in the lower end of the market comfort zone of 2.5 to 4.5 million barrels per day (mbd), as market balancers Saudi Arabia , Kuwait and the United Arab Emirates, continue to produce at high levels, in part to offset some 3.5 mbd of offline supply globally.

The global balance should tighten this summer with the seasonal recovery in demand.

Energy analysts say further global oil price hikes could boost talks of releasing oil from strategic reserves. Further supply cuts in Iraq would likely push world oil prices even higher, perhaps towards $120, a level that could trigger talks among consuming countries about exploiting strategic stocks.