Oil prices reached a nine month high in June in response to concerns over Iraqi oil supply in the wake of the advance of insurgents in Iraq. The price of Kuwait export crude (KEC) reached $108.9/bbl while international benchmarks, Brent crude and West Texas Intermediate (WTI), topped $115/bbl and $107/bbl, respectively, in June.
September 2013 was the last time prices were at these levels. Following the fall of Mosul and Tikrit, fears were elevated that the insurgents would capture oil fields and oil export infrastructure in the vicinity of Kirkuk, where the bulk of federally-controlled northern oil production is situated. News that Iraq's largest refinery, the 300,000 b/d Baiji complex, which is located north of Baghdad and source of much of the country's refined products including gasoline, was also targeted by rebels seemed to add to market jitters. Similarly, Brent futures—the price for a delivery of Brent crude in December 2014—also reached a year-high of $112.6/bbl on 24 June on the back of the Iraq crisis. Continued supply outages in Libya and a build-up of China's strategic oil reserves also helped to propel futures prices.
Nevertheless, oil prices did begin to retreat once it became clear that the insurgents would not be able to take Baghdad so easily, secure a foothold in Kirkuk and its oil-rich environs where Kurdish Peshmerga forces had quickly taken up positions or move southwards to where the majority of Iraq's oil production and export terminals in Basra province were located. In fact, market worries over Iraqi oil supply were largely about future production and the impact that persistent strife would have on Iraq's ability to meet future oil targets in the context of burgeoning global oil demand, rather than current output.
Indeed, burgeoning oil production from the Rumaila and West Qurna-2 oil fields in the south has helped propel Iraq's total oil productionabove 3 million barrels per day (mb/d) for the last four months—and in spite of the curtailmentof at least 250,000 b/d of Kirkuk crude due to damage sustained to the Kirkuk-Ceyhan pipeline, the main export route for northern Iraqi crude to Turkey. The pipeline has been out of commission since March due to sabotage. By the end of June, Brent fell back down to $110/bbl while WTI finished the month at $106/bbl, with the re-opening of the El-Feel oil field in Libya also helping to ease worries about supply constraints.
World oil demand is forecast by the International Energy Agency (IEA) to grow by 1.3 mb/d, or 1.5 per cent, to reach 92.8 mb/d in 2014. This reflects an improvement in the global economy. Much of the growth is expected in the final quarter of this year, with global oil demand rising from a low of 91.4 mb/d in Q1 2014 to a high of 94 mb/d in Q4 2014.
In May, OPEC crude output (including Iraq) reached 30.7 mb/d, increasing by 0.25 mb/d, or 0.8 per cent m/m, from April, according to data obtained through direct communication. This is the second consecutive month that OPEC production has increased since a 12-month low was witnessed in February. The largest month-on-month production increases were recorded by the United Arab Emirates, Iraq and Saudi Arabia: 9.2 per cent, 3.7 per cent and 0.5 per cent, respectively.
Iraq's burgeoning oil output, which reached 3.18mb/d in May, is a reflection of increasing production from the country's southern fields, including Rumaila and West Qurna-2, which has managed to compensate for the loss of northern Iraqi crude from the Kirkuk fields as a result of the attack on the Kirkuk-Ceyhan pipeline in March.
In contrast, declines in output were observed, notably, in Kuwait, Nigeria and Libya. Libya's oil production dropped to a two-and-a-half year low of 217,000 b/d in May as the country continued to reel from a combination of strikes and blockades by rebel groups. 85 per cent of Libya's pre-Gaddafi-era oil output has been shut-in over the last year or so.
Meanwhile, total world supplies increased by 0.53 mb/d in May, to 92.6 mb/d. This was mainly attributable to an increase in non-OPEC production, however. Of special note are the output gains being made in the US thanks to the shale and tight oil revolution. Non-OPEC supplies (including OPEC NGLs) are forecast to increase by 1.5 mb/d in 2014.