The wholesale inflation and consumer sentiment data today will
likely not be enough to distract the market from the unsettling
headlines out of Iraq. The heightened uncertainty is pushing
higher, though I don't believe there are any immediate threats to
oil supplies out of Iraq.
The Iraq situation is no doubt unsettling, with developments on the
ground pointing towards a three-way split for the country - the
Kurds in the north, the incumbent Maliki-led Shiite government in
the south, and the new extreme Sunni insurgents-led growing pocket
in the center. But as we all know, Iraq is no ordinary Middle
Eastern country; it has the 5th largest oil reserves in the world
that it had only recently started tapping after years of war and
sanctions. No doubt global oil prices have responded the way they
have to the news flow out of that country.
But the oil market's reaction appears to be more emotional and
knee-jerk rather than reflective of ground realities. There is
literally no threat to Iraqi oil supplies even if the extremist
forces (Islamic State of Iraq & Syria or ISIS) are allowed to
entrench their positions and carve out Sunni state out of Iraq and
The reason for that is 3/4th of Iraqi oil reserves and volumes are
in the Shiite majority south of the country that get exported
through the Persian Gulf port of Basra. The Shiite-dominated Iraqi
army's embarrassing performance in Mosul and other Sunni regions
thus far notwithstanding, they are unlikely to do the same if the
fight ever came to their doorstep in the Shiite parts of the
country. Assuming the ISIS forces are rational, they will keep the
pressure on Baghdad and the Shiite region, but are unlikely to
mount an actual attack on the region. Meaning that he bulk of Iraqi
oil will continue to flow through to international markets from
southern port of Basra.
The rest of Iraq's oil is in the autonomous Kurdish region, which
only pays lip service to being part of Iraq and the Shiite
Maliki-led national government in Baghdad. The town of Kirkuk on
the edge of the Kurdish region is the main legacy oil-producing
area and it remains firmly under Kurdish control. In fact, the
Kurds already have independent pipeline infrastructure to export
their oil through Turkey. Importantly, unlike the bumbling and
flighty Iraqi national army, the Kurds have a reliable fighting
force in the Peshmerga army, which the Sunni extremists will try
their best to avoid.
Bottom line, there is no immediate threat to oil supplies from Iraq
as result of the three-way split of the country. That said, the
carve out of an extremist-led Jihadi haven out of Iraq and Syria,
kind of a pre-911 Afghanistan in the Middle Eastern tinderbox, is
very destabilizing. Why it happened and what can be done about it
is beyond the scope of this piece, but suffice it to say that this
is an immensely complex situation that doesn't lend itself to easy
What this means is that there may not be an immediate threat to
global oil supplies. But the Iraqi developments of recent days
represent the most ominous threat to the Middle Eastern status quo.
It is this resulting uncertainty that the global oil markets are
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