The Week In Hindsight; 13 June 2014
Oil prices accelerated rapidly this week as recent unrest in Iraq spilled over into outright open conflict. Reports from the latter half of the week suggest a Sunni Islamic sect from the north of the country has mobilised a brigade of militants and, at first glance, attempted to take the country. The uprising has, so far, led to the capture of a growing number of arterial cities while several key oil refineries in the north are also believed to have been seized.
Information reported via both Bloomberg and Reuters on Thursday afternoon indicated that the militant forces were, at the time, advancing toward the capital Baghdad with the intention of seizing it.
The unrest has prompted Shi’ite militias to mobilise outside of Baghdad, after government forces abandoned their posts, with the intention of defending the city. In response to the conflict, Barack Obama has publicly pledged his support for the Iraqi government and in a statement released on Thursday evening, also alluded to the possibility that the United States could intervene in militarily in order to preserve Iraqi democratic integrity.
Going forward, our base case scenario sees the potential outcome from this being increased levels of violence and disruption at the national level, with a moderate to high degree of risk that this evolves into some form of civil war.
On a worst case scenario basis, a protracted civil conflict evolves, oil output (economy) is severely disrupted and the international community is drawn into providing military support to the government and Shi’ite militias.
In summary, without an effective de escalation the conflict is likely to mean higher prices for the foreseeable future, given that Iraq has been the biggest net contributor to increasing OPEC output over recent months.
Going forward, we see Brent Crude as likely to draw strong support for prices upon any retreat toward the 111.50 level, while a further escalation of the conflict could lead to a sustained move toward or above the 114.50 level.
In relation to North American WTI Crude, we see strong support for prices upon any retreat toward the 105.50 level, while a further escalation of the crisis would likely lead to a move toward the 108.00 level.
These would be the highest trading prices for Brent and WTI Crude since the international community threatened intervention in the Syrian civil war during 2013.