The Week In Hindsight, 20 June 2014

Brent crude was headed for another week of gains this Friday afternoon as the conflict in Iraq escalated further, with fierce fighting over the nation’s largest oil refinery threatening to continue into the weekend.

WTI Crude fell throughout the week in response to weaker than expected economic data in the US and downward revisions to the US growth outlook from Janet Yellen and the FOMC.

In addition to the conflict in Iraq; fighting also raged in Ukraine, with an estimated 300 rebels killed by government forces. Thomson Reuters posted on Friday afternoon that Washington had “official” information that Russia had returned a large number of troops, supported by heavy weaponry, to the Ukrainian border.

Going forward, we see an immediate resolution to the conflicts across Iraq and eastern Europe as unlikely. As a consequence, we expect continued support for Brent crude at elevated levels with any downward pressure becoming exhausted at or around the $112.00 mark.

Our rationale for this belief is drawn from anticipation of a knock on effect to OPEC output given that Iraq has been the largest net contributor to recent increases in OPEC production. The nation’s largest refinery in the north, which is currently closed and under siege from militants, is believed to be responsible for a significant enough portion of the nation’s output to force Iraq into tapping the European market for Brent imports.

This is while there remains a real threat that violence further escalates over the coming weeks and that it then spreads from the north to the south. This would seriously compromise economic output and oil production. When factored in with the potential for a further escalation of violence in Ukraine; it is clear to us that risks to Brent supply remain high.

In relation to WTI crude, further draw downs of inventories over the course of the week provide scope to suggest that North American demand could also add to supply constraints over the weeks ahead, although this argument is less well supported in the face of heightened uncertainty surrounding economic growth expectations following Janet Yellen’s comments on Wednesday.

Going forward, the Iraq conflict provides support for prices remaining at elevated levels over the week ahead, with any downside likely to remain limited to $103.00 per barrel.. Nevertheless, economic data will be more of a factor in WTI price action than is the case for Brent and as a result, we are cautious of the outlook for prices given pending home sales, durable goods, and consumer confidence data which is due next week.