It’s been a long time since geopolitical developments caused major movements in the oil price, but the escalating tension between the U.S. and Iran, combined with the sudden military clashes in Iraq, has pushed geopolitical risk back on to the agenda for the oil market.
“Geopolitical risks to the oil market have continued to intensify,” Goldman Sachs wrote in an October 17 research note. In addition to Iraq and Iran, the decline in Venezuela’s oil production “appears to be accelerating,” while the resurgence in output from Libya and Nigeria continues to be fragile. “There remains high uncertainty on the potential impact of these new tensions on the oil market.”
But it’s Iraq and Iran that have really raised fears of outages. As of October 17, preliminary reports suggest that about 350,000 bpd of oil production from the Kirkuk oil fields were disrupted, with conflicting reports about whether or not that output has come back online. Iraqi officials said that the interruptions would be temporary and short-lived, and the Kurdish government insisted that it wouldn’t block exports through its pipeline system.
It’s in the interest of both sides to keep the oil flowing, but there’s still a risk of miscalculation and escalating conflict. The problem for Baghdad is that the oil must continue to flow through Kurdish pipelines, as the Iraqi government’s preferred pipeline system is damaged and needs repair. That means that both sides need to agree to some sort of revenue sharing arrangement, but that’s been an intractable issue in the past.
Unlike Iraq, Iran presents very little near-term risk. Instead, it will take time to see the response from Washington. If the U.S. reimposes sanctions, “several hundred thousand barrels of Iranian exports would be immediately at risk.”
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