Crude Oil Prices Soaring on New Attacks in Iraq; Here's Where They're Headed

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"For now, oil exports and southern production are not impacted by the ISIL movement, but the fall of the Baiji refinery today does increase concerns over the growing turmoil in the country."

Iraq

Crude oil prices are hovering near 52-week highs this morning (Wednesday), following news that Sunni militant fighters have attacked Iraq's main oil refinery in the city of Baiji.

According to reports, militants set the refinery on fire after gaining partial control of the facility Wednesday morning.

Oil Price Chart

Crude oil prices reached $106.36 per barrel, just below last Thursday's high of $107.68 following the news.

Today's attack is part of a week-long campaign where militants from the Islamic State of Iraq and al-Sham (ISIL) have gained control of several cities in northern Iraq. The attacks are part of a Sunni uprising against the Shiite Muslim-controlled government.

The Baiji oil refinery is one of Iraq's main sources of domestic fuel, and today's attack does not impact production or exports from the country's oil fields in the southern part of the country. So far, the Sunni insurgence has only affected northern and central Iraq.

The absolute majority of Iraqi oil comes from the south," Money Morning's Global Energy Strategist Dr. Kent Moors said. "To the extent that ISIL has Baghdad as its objective, the southern oil fields are not in danger."

"ISIL is a Sunni uprising in what is a Shiite-dominated country. The southern region centered around Basra is heavily Shia and becoming closer with each passing day to neighboring Iran, also a Shiite country."

Iran appears set on protecting the Shiite oil fields of southern Iraq as multiple reports this week detail the Iranian Revolutionary Guard and other militia forces moving into the southern region to protect the area.

For now, oil exports and southern production are not impacted by the ISIL movement, but the fall of the Baiji refinery today does increase concerns over the growing turmoil in the country.

And as concerns mount, there will be a big impact on crude oil prices today and in the future. . .

Iraqi Crisis' Impact on Crude Oil Prices Today

According to Moors, oil prices will continue higher, even though exports have yet to be affected.

"When it comes to the impact this crisis has on oil prices, this is one of those classic cases where the unfolding events have more to do with perceptions than reality," Moors said. "So far, the fighting does not affect oil production or export routes."

But because ISIL is attempting to overthrow the Shiite government, a successful rebellion would tear the country apart and create export issues, even if the routes and production are unaffected.

"Paralyzing the government in the capital city would create significant problems for both the production and export of oil," Moors said. "There would be no administrative structure, no reliable regulatory oversight, and a rising inability for operating companies to budget and plan."

Additionally, the crisis could create a situation in which major oil companies suspend oil production throughout southern Iraq.

"Should any of the international majors working in southern Iraq reduce or suspend field operations in the wake of all this uncertainty, the knock-on effects on wider oil prices would well exceed the actual loss of production," Moors said.

"Remember, we are moving into an environment in which perception is more important than reality. In normal times, a trader determines the price of an oil consignment on the expected price of the next available barrel. In uncertain times, that level is determined by the expected price of the most expensive next available barrel."

"Oil prices will rise beyond what the market really justifies, and then take a breather, to start rising again in the absence of any resolution of the crisis at hand," Moors said.

Kyle Anderson
Money Morning

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