Blue Point Trading - Oil and Iraq, set to explode?

[B]Oil and Iraq, set to explode?[/B] An Oil price spike dominated last weeks trade as conflict in Iraq has flared again. Geopolitical threats and higher Oil prices, which acts as heavy tax on the economy, threatens the currently perceived economic recovery, and hence equities and the “risk on” trade suffered. So where are Oil prices going?

Iraq’s oil production surged to its highest level in over 30 years last month. Iraq has the fifth largest proven crude oil reserves in the world, and it passed Iran as the second largest producer of crude oil in OPEC at the end of 2012. In April 2014, Iraq was producing an estimated 3.3 million barrels per day — equal to about 4 percent of global supply. Losing 4% of global Oil supply could be dramatic, but not necessarily catastrophic – assuming the current conflict does not last long and does not spread to other countries.

So far, the fighting has largely been isolated to cities in the north, including Mosul and Tikrit, where the fighters of the Islamic State of Iraq (ISIS) and Syria have taken control. Iraq’s main oil fields and export facilities are clustered around the city of Basra in the south. But traders are worried that the action could spread.

The Sunni-led ISIS insurgents have threatened to push to the capital, Baghdad and regions further south dominated by Iraq’s Shia Muslim majority, whom they regard as “infidels.” Nouri al-Maliki, the current Iraqi Prime Minister and his controlling party, is Shia. We know that much of the conflict is a sectarian war amongst the factions of the Islamic faith.

It should be noted that 89% of Iranians are Shia and only 9% are Sunni. Saddam Hussein if you recall was Sunni, so the recent ISIS, is a bit of a reincarnation of this Sunni control. So the current US backed Iraqi government and Iran, often thought to have great influence in Iraq, are all on the same side. The common ISIS enemy could make strange bedfellows.

The US says it is looking at “all options”, including military action, though US President Obama has ruled out any boots on the ground. He is taking considerable heat from his opponents – they say, “we won the war in Iraq and now you have lost it.” Well, I am not sure the US won anything, but nevertheless the political pressure for Obama to do something is there. So what is the foreign policy strategy being used now by the US?

Once again Obama will try to thread the diplomatic needle, while fending off his critiques, and use Iranian cooperation to fight the ISIS (from a distance with drones) and get a larger nuclear arms deal for working with them. He must do this without offending Saudi Arabia who are mostly Sunni. Yes I know all this Sunni and Shia talk is hard to follow, if you are not familiar with it – but it does matter to see where the political fault lines are.

We shall see if Obama can turn these lemons into lemonade. People are quick to critique the current US President, self included, but we do need to appreciate the grave decisions that have to be made on our behalf. A miss-step could be tragic. I for one believe that this president does have the intellect to see the broader issues, unlike many of the other US politicians and pundits. So let’s stay positive and hope for the best.

For the markets, Oil will stay well bid and could go in excess of $110, as it breaks up out of its weekly wedge technically. It also could cause the overall “risk on” tone to stumble in the equity markets. If Obama can’t thread the needle, and a more larger regional war erupts – this is the unthinkable, and it would be hard to put any price on Oil.

Blue Point Trading, William Thompson