The advance of the ISIS-insurgents in Iraq’s northwest has to date produced hardly a ripple on oil markets, ABN AMRO observes, with oil prices edging up by just a few US dollars. Given that oil production in Iraq’s northeast has been blocked for several months already, the country’s entire oil export is now coming from the southeastern city of Basra, where oil production and exports hit ten-year highs in May and June.
ABN AMRO is convinced, moreover, that neither neighbouring oil-producing countries nor the international community at large, and the United States in particular, will allow ISIS to gain control over the large oil fields in Iraq’s south. As a consequence, the bank’s economists see little risk of Iraqi oil exports coming to a standstill. Besides, any dip in Iraqi production can be offset by extra oil production in other OPEC countries, notably Saudi Arabia. Going forward, Iraq will remain a key oil producer as global – read Asian - demand continues to grow.
Oil supply sufficient in years ahead
Although risk levels have risen, ABN’s basic scenario (which focuses on the next two years) envisages a situation in which oil prices will remain stable or fall slightly. This scenario assumes that the supply of oil will remain sufficient in the years ahead. Global demand is set to increase at a very modest pace, and this extra demand can be met thanks to surging oil production in non-OPEC countries like the US and Canada. Oil production in Libya, Nigeria, Syria and Iran is currently down by about three million barrels a day, and this trend is starting to look more or less structural, but ABN AMRO believes other OPEC countries can make up for this shortfall. All this is likely to involve little in the way of unrest, volatility or oil shortages. So the odds of an oil crisis are pretty remote. On the contrary, given the abundance of oil, in combination with an appreciation of the US dollar, ABN expects oil prices to trend slightly lower.
Oil production disruptions can lead to structurally higher prices
A risk scenario that has become more prominent following recent events in Iraq is that of a prolonged period of structurally higher oil prices, with a barrel of Brent crude costing more than USD 130. ABN AMRO sees such a scenario coming closer to reality if Iraq’s oil production is disrupted for months on end, and no investments are made to guarantee a return to higher production levels in the longer term. Extended oil production and export disruptions in other OPEC countries, in combination with fresh production outages, could add to upside price risk. Plus, if oil production in the US and Canada peaks far earlier than expected, and economic growth – not just in Asia, but also in the US and Europe – accelerates more quickly than anticipated, oil prices could also trend higher.