The oil market has been able to brush off geopolitical worries over the past few years because of a persistent glut and relatively low prices. But now that supply-demand fundamentals are tightening, instability in oil-producing countries cannot be ignored. ICE Brent jumped as high as $58.47 per barrel on Monday as Iraqi forces advanced on Kirkuk to reclaim oil fields that the Kurdistan Regional Government (KRG) has held since 2014. Prices are still within this year’s range but additional any supply disruptions will likely push the market to fresh highs.
The fighting comes three weeks after the Kurds voted overwhelmingly in a referendum for independence from Iraq. Their vote was condemned by most of the international community, including Baghdad and Washington. Besides increasing tension with Baghdad, the KRG also faces Turkey’s threats to shut the pipeline that ships KRG oil to the Turkish port of Ceyhan.
The connection between oil and geopolitics has driven market instability and price volatility for decades, and the circumstances do not look to improve anytime soon. The Middle East promises more unrest.
The KRG produces approximately 600,000 barrels per day (b/d) and says it holds 45 billion barrels of oil reserves. For all of Iraq, OPEC’s second largest, production averages 4.5 million barrels per day (mbd), close to 5 percent of global output. Oil has been and will continue to be at the center of long-standing conflicts between Erbil and Baghdad. The disputes with Baghdad and the KRG’s late payments to oil companies have undermined investment in the region. “Investors who braved Kurdistan years ago always knew they were investing in a region where politics were volatile and the tanks might roll,” the FT said.
Crude exports from the disputed area continued to flow at normal levels on Monday and Iraqi forces captured Kirkuk. Although prices eased from their high on Monday, the tension in Iraq highlights the ongoing reality of the global oil market: Many key oil-producing countries are politically unstable. Their resources are a point of conflict and the goals of many of the producers’ governments are at odds with the U.S. Crucially, consumers have to rely on these unstable producers for supply. The connection between oil and geopolitics has driven market instability and price volatility for decades, and the circumstances do not look to improve anytime soon. The Middle East promises more unrest.
The U.S. has imposed financial sanctions on Caracas, but stopped short of banning Venezuelan crude imports or halting exports of refined products to the South American country. The latest elections could bring another round of measures.
Over the weekend, another major OPEC producer dealt with its own strife. In Venezuela, President Nicolás Maduro’s United Socialist Party of Venezuela (PSUV) won at least 17 of 23 gubernatorial seats in regional elections that are considered a sham. Opponents of the government point to abnormalities and fraud in the elections, similar to the vote over the summer that allowed Maduro to jail critics and crush the opposition. Economic upheaval from lower oil prices, mismanagement of oil revenues, and Maduro’s move toward authoritarianism have damaged the country’s oil sector. Oil production is now under 2 mbd, down 25 percent from 2014. The U.S. has imposed financial sanctions on Caracas, but stopped short of banning Venezuelan crude imports or halting exports of refined products to the South American country. The latest elections could bring another round of measures.
Heightened geopolitical tensions are looming over the oil market at a time that OPEC and its non-OPEC allies are cutting production by 1.8 mbd, or 2 percent of the global oil supply, in an effort to increase prices and tighten inventories. OPEC holds more than 80 percent of the world’s proven crude oil reserves, with about two-thirds of that amount in the volatile Middle East. OPEC reasserting itself to cut output is worrisome on its own. However, many of its members will also remain geopolitical flashpoints with their supply vulnerable to unplanned outages.