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Oil markets indifferent to latest Islamic State victory in Iraq

Iraqi oil production is growing, writes Nick Cunningham, even as Islamic State gains ground. The global glut of crude has insulated markets against geopolitical shocks, and the fall of Ramadi hasn't impacted production in Iraq's oil-rich South.

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    Oil personnel work at the Rumaila oil refinery near the city of Basra, Iraq in this 2009 file photo.
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A major city in Iraq fell to ISIS militants, marking another milestone in the ongoing war between the US and Iraqi governments on one side, and the extremist group on the other.

The Middle East is no stranger to instability. In the past, when violence would erupt in a major oil producing country, such as Iraq, oil prices would respond with a price spike. The threat of supply disruptions would add a risk premium on top of the price of oil, adding a few dollars per barrel. Prices skyrocketed in 2011 after the onset of the Arab Spring, for example, particularly when Libya began to unravel.

But with an ongoing glut in oil supplies, geopolitical instability appears to be having much less of an impact on oil than it did in years past.

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Over the weekend Islamic State seized Ramadi, the most important city in the Al-Anbar province. Iraqi forces retreated despite air support from the US. The fall of Ramadi also came after a recent assessment from the Pentagon, which concluded that ISIS was on the defensive in Iraq. (Related: Big Oil May Be Caught Off-Guard By Wave Of Retirement)

The fall of another major Iraqi city to ISIS, one would think, would raise some serious questions about Iraq’s security, and as it relates to energy, the security of its oil supplies. To be sure, most of Iraq’s oil production is situated far south of Ramadi, around Basra on the Persian Gulf. Those massive oil fields are not in any immediate danger. But that hasn’t stopped markets from surging in the past on news of violence. Just last year, when IS overran parts of northern Iraq, the price of crude jumped.

On May 18, however, oil markets largely ignored the news, with prices flat out of the gates. There are two main reasons for this. The first is an obvious one: Global oil supplies remain robust, surging by 3.2 million barrels per day in April from a year before. Inventories are still filled to the brim, and will take time to draw down. There is little threat of a shortage, at least in the short-run.

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That is why some outages in Iraq – a few fields retaken from ISIS have yet to come back online – and ongoing violence have barely registered in the international price.

Another reason the oil markets shrugged off the events in Ramadi is the massive increase in oil production from Iraq itself. That’s right, despite the onslaught from ISIS, Iraq has scaled up oil output over the last year. From 2013 to 2014, production climbed from 2.9 to 3.1 million barrels per day. But progress has accelerated in recent months. It had a down month in February, averaging just 2.7 million barrels per day, but that figure leapt to 3.3 million barrels per day in March.

June could be even better for the war-torn country. Iraq is expected to see its oil exports surge by 700,000 barrels per day, according to Bloomberg, putting its overall export level at 3.75 million barrels per day. (Related: Does Fossil Fuel Divestment Make Sense?)

That high level of output is being pumped into an already-oversupplied market. That is why the offensive by ISIS is not having much of an effect on the price of crude. Unlike last year, when very little was known about ISIS, oil traders are no longer worried about Iraqi supplies. Unless, and until, a major field is taken offline, the fortunes of the militant group may not have much influence on oil prices.

Of course, that could change. As global demand continues to rise and soaks up the extra supplies, markets will tighten. Similarly, as US drillers see their productions decline, the surplus will be trimmed. At that point – still months away – an unexpected strike by ISIS could have a much larger effect on oil prices.

But until then, violence in Iraq won’t have the market sway it once did.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Original story: http://oilprice.com/Energy/Oil-Prices/Oil-Markets-Indifferent-To-Latest-ISIS-Victory-In-Iraq.html

Source: http://oilprice.com/

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