Brent crude was projected by Wall Street analysts to average as much as $116 a barrel by the end of the year. Now, with violence escalating in Iraq, how far the price will rise has become anyone’s guess.
The increase in concern about Iraqi supply comes as fighting in Libya has curbed production in the North African country, international sanctions against Iran for its nuclear programme have cut its exports and sabotage reduced the flow of Nigerian barrels.
The international benchmark surged above $114 on June 13, for the first time in nine months as militants routed the Iraqi army in the north and advanced toward Baghdad, threatening to ignite a civil war.
The Islamic State in Iraq and the Levant, known as ISIL, has halted repairs to the pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. The conflict threatens output in OPEC’s second-biggest crude producer.
The Persian Gulf country is forecast to provide 60 percent of the group’s growth for the rest of this decade, the International Energy Agency said June 13. Global consumption will “increase sharply” in the last quarter of this year and OPEC will need to pump more oil to help meet the demand, according to forecasts from the Paris-based IEA.
“We’ve been waiting for the other shoe to drop in this tightly balanced market and now it’s happened,” Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said June 13 by phone. “There have been lurking risks but nobody was projecting how quickly things would turn worse.”
Brent for August settlement rose as much as 82 cents, or 0.7 percent, to $113.28 a barrel on the London-based ICE Futures Europe exchange MMonday. The July contract expired June 13 after climbing 0.4 percent to $113.41, the highest close for a front-month future since Sept. 9. Vikas Dwivedi of Macquarie Group Ltd. predicts Brent will average $116 in the fourth quarter. He was the best forecaster of Brent prices in the first quarter, according to Bloomberg Rankings.
West Texas Intermediate crude, the US benchmark, rose as much as 63 cents, or 0.6 percent, to $107.54 a barrel on the New York Mercantile Exchange.
Oil-price volatility rebounded from the lowest on record as the violence escalated in Iraq. The 20-day historical volatility of Brent futures rose as high as 13 percent on June 12, according to exchange data compiled by Bloomberg. It was at 7.2 percent on June 3, the least since the contract began trading in 1988.
The volatility is a reflection of market uncertainty, according to Olivier Jakob, managing director of Switzerland-based researcher Petromatrix GmbH.
“The market is going to be whipsawed by headlines from Iraq,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said June 13 by phone. “If there’s shooting on the streets of Baghdad, we’ll get a spike in prices, but I don’t see WTI passing $120.”
ISIL has control of the pipeline to the 310,000 barrel-a-day Baiji refinery, the country’s biggest. The insurgents also took Mosul, the country’s second-largest city. Kurdish forces moved into Kirkuk to protect the northern oil fields from the militants. The main pipeline from that field to Turkey hasn’t operated since early March because of attacks.
The fighting hasn’t spread to the south, which the US Energy Information Administration says is home to three-quarters of Iraq’s crude output. The country’s three biggest oilfields – Rumaila, West Qurna-2 and Majnoon – lie in the south, and crude production there has been increasing. The region has a Shiite majority opposed to ISIL’s Sunni militants.
