Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

The Oil Crisis Price Spike Is Just Getting Started

Commodities / Crude Oil Jun 19, 2014 - 12:04 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: First there was the crisis in Ukraine. Then, seemingly out of nowhere, Iraq exploded into chaos again.

Both testify to one simple truth about today's energy sector: Geopolitical factors are the quintessential wild cards when it comes to estimating energy prices.


As for crude, prices have been subdued both yesterday and this morning following a crisis-related spike. But with two full-blown crises now looming, you can bet that's not going to last.

Oil prices are now likely headed higher.

In this case, supply and demand only works in the textbooks. These days, geopolitical events can quickly outdistance the "market-only" factors.

That's especially true in Iraq, where insurgents of the Islamic State of Iraq and the Levant (ISIL) are still on the move...

The Dangerous "Balance" in Iraq

Of the two crises, this is the one that concerns Americans the most. It may be only 275, but U.S. troops are moving back to Iraq.

On top of that, Washington is going to start consultations with Tehran. The entire region - from Riyadh in Saudi Arabia, through Amman in Jordan, to Ankara in Turkey - is in turmoil following the Sunni insurgency.

But when it comes to the impact this crisis has on oil prices, this is one of those classic cases where the unfolding events have more to do with perceptions than reality. So far, the fighting does not affect oil production or export routes.

Northern oil, accounting for about 20% of all national extraction, is centered around Kirkuk, with the export venue being a major pipeline system to Ceyhan in southeastern Turkey. This area is now controlled by the semi-autonomous Kurdistan Regional Government (KRG) in Erbil and its very effective militia, the Peshmerga.

The absolute majority of Iraqi oil comes from the south. To the extent that ISIL has Baghdad as its objective, the southern oil fields are not in danger.

ISIL is a Sunni uprising in what is a Shiite-dominated country. The southern region centered around Basra is heavily Shia and becoming closer with each passing day to neighboring Iran, also a Shiite country.

The south also has its own militia, and they will present major problems to any further ISIL advance. In addition, there have been reliable reports over the past few days that detachments of the Iranian Revolutionary Guard and other "volunteers" have been moving into southern Iraq.

Just yesterday it appears an Iranian general arrived in Basra to assist in the coordination of Shiite defenses for the area. The reality of what is happening on the ground will dictate that Washington bow to the inevitable and accede to some enhanced Iranian presence.

The Sunni Insurgency and Oil Prices

This will initiate the first of three factors that will impact global oil prices. And you won't need to have the uprising take over oil fields for this to have an effect.

First, the Iranian moves and what will now be an intensifying drive for outright independence in northern Kurdistan run the risk of trifurcating the country along ethnic and religious lines - Kurds controlling the far north, Sunnis the central portion of the country, and Shiites the south.

Second, ISIL honcho Abu Bakr al-Baghdadi has proclaimed the objective of his uprising is to unseat the Shiite government of Prime Minister Nouri al-Maliki. That objective is actually shared by the Kurdistan Regional Government, Turkey, and other elements in the region. Yet, paralyzing the government in the capital city would create significant problems for both the production and export of oil. There would be no administrative structure, no reliable regulatory oversight, and a rising inability for operating companies to budget and plan.

Of course, the other ISIL goal of setting up a sharia-based caliphate on the border between Iraq and Syria would fundamentally shatter any possible stability in the entire Gulf.

Third, should any of the international majors working in southern Iraq reduce or suspend field operations in the wake of all this uncertainty, the knock-on effects on wider oil prices would well exceed the actual loss of production.

Remember, we are moving into an environment in which perception is more important than reality. In normal times, a trader determines the price of an oil consignment on the expected price of the next available barrel. In uncertain times, that level is determined by the expected price of the most expensive next available barrel.

Oil prices will rise beyond what the market really justifies, and then take a breather, to start rising again in the absence of any resolution of the crisis at hand.

Not One, but Two Full-Blown Crises

Meanwhile, in Ukraine, Russian natural gas dominant Gazprom (OTCMKTS ADR: OGZPY) has cut off exports to the country while pledging to keep flow across Ukraine to Europe intact.

This will begin having a major impact as we move closer to September. Currently, European demand is low as summer sets in, and Ukrainian underground storage facilities have ample supply to meet reduced need at home.

That will change as fall arrives. Kiev said yesterday that it had enough gas to last until December, but that does not address the need to pump supply into storage wells before that.

As this energy problem deepens, there is widespread belief that Ukraine will begin siphoning off throughput bound for Europe for its own use. The real crunch, therefore, is several months away.

And Europeans remember all too clearly two weeks of freezing during a dreadful winter in 2009, the last time Russian gas was interrupted crossing Ukraine. The European Union has been successful in diversifying its supply sources since then and now only relies on Ukrainian throughput for just 15% of what it needs on a daily basis.

Still, the possibility of another interruption of that delivery obliges Europe to rebalance its delivery venues now. The Nord Stream pipeline from northern Russia to northern Germany via the Baltic Sea floor is uninterrupted. But the rising political animosity between Brussels (the seat of the EU as well as NATO) and Moscow will add some pressure, even though there is no indication long-term contracts are likely to be impaired.

Additional consignments of liquefied natural gas (LNG) from Qatar and North Africa are possible, although the latter is always subject to the vicissitudes of a morphing Arab Spring. So Europe has to balance its rising distrust of Russian intentions with its own energy requirements.

Longer-term solutions involve LNG deliveries from the United States and development of domestic shale gas. However, American deliveries are at least 18 months away, while local shale gas supplies are further down the road and still must face major political opposition and technical challenges.

But make no mistake. Neither the Ukrainian nor the Iraqi crisis is going to be a short-lived event. Both Kiev and Baghdad will emerge as significantly weakened seats of government.

All of which makes the period we are moving into a very chaotic one for oil prices.

Source : http://moneymorning.com/2014/06/19/the-oil-crisis-spike-is-just-getting-started/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules