Friday, June 13, 2014

US energy markets are not insulated from the unrest in Iraq

The situation in Iraq continues to unravel. The nation's government and some in the media are calling this a "terrorist insurgency". In reality what we have is a large armed Sunni group, supported by militant factions from Syria, quickly gaining ground against the Shia-controlled government forces. It's a civil war. Many Shia families are leaving Baghdad as the Sunni militants advance. And now Iran is getting militarily involved in an attempt to defend Shiite interests in Iraq.

The risk of further escalation is threatening to cut Iraq's oil output and even destabilize the region.
NY Times: - traders are worried that the action could spread, threatening supplies. Iraq is the second largest oil producer in OPEC, representing the largest source of growth among the 12 member countries.

Of perhaps greater concern is that the growing instability in Iraq and the unrest in other big petroleum-producing countries could alter the geopolitical dynamics that have kept oil prices remarkably stable although relatively high for the last three years. The Russian annexation in Crimea and the chaos in Libya “point to a systemic and seismic shift geopolitically,” Edward L. Morse, head of commodities research at Citigroup, wrote in a note to clients on Friday.
Oil prices have been on the rise as a result, with US crude prices following Brent higher.

WTI (US) crude oil (source: barchart)

US crude inventory however is still near the top of its five-year range and there is no immediate risk of any crude shortages in the US. Yet prices are rising. Energy "independence" does not mean price independence.

Source: EIA

US politicians and to some extent the public continue to believe that higher domestic production will somehow shield Americans from this type of Middle-East-driven price volatility. While increased energy production is helping reduce the trade deficit, unrest elsewhere in the world can still become a problem at the pump in the US. And as the situation in Iraq destabilizes further, the impact on the US consumer will intensify. Iraq is "closer to home" than many would like to believe and the equity markets are beginning to reflect it.

Source: Ycharts

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