Al-Qaeda is on the run?

Risk premium on the rise

We have got Al-Qaeda on the run. The problem is that they are running over cities in Iraq driving oil to the highest level of the year. The southern oil regions of Iraq are still pumping and exporting oil but the threat by ISIS and Islamic State of Iraq and the Levant (ISIL), which are the successor organizations to al-Qaeda in Iraq driving the risk premium in oil.  ISIS threatened to continue their assault on Bagdad.

While President Obama says that all options are on the table the void that was left by what some perceive as a premature pull-out in Iraq is becoming glaringly obvious. White House spokesman Jay Carney says that there will be no boots on the ground making it difficult to know what the White House strategy is.

Iran of course has no qualms about putting troops on the ground and has already deployed their Revolutionary guard forces to try to stop the Sunni extremists from over running the rest of the country. Reports are that Iran helped retake the city of Tikrit. Turkey also has warned the Islamic State of Iraq and the Levant (ISIL) it will retaliate if any of its 80 nationals kidnapped by insurgents in northern Iraq are harmed. The violence is putting vital supply at risk and the markets will respond to any late breaking developments either higher or lower. Iraqi Prime Minister Nouri al-Maliki has asked for U.S. help but so far it is unclear what the President plans to do.

The northern oil fields have been taken yet that area of the country was not really active. There had been damaged pipelines due to sabotage.  Basra in the south of Iraq seems to be operating normally and any attack on Bagdad may be met with much tougher resistance. Yet with politics in Iraq very muddled it is unlikely that we will see the type of leadership that can not only withstand the current threats but also the ongoing internal strife that will no doubt last far longer that whatever happens over the next 48 hours. Iraq’s coveted 3.5 million barrels a day of high quality oil will be missed but also we will see reduced expectations for further export growth that the market was already trying to price in. Instead of dreams of 4 million or 8 million barrels of exports in the future we have to hope that they can maintain these 3.5 million barrels of oil a day which was a 30-year high. 

In the short term the market will look to the Saudis and the United States to fill the void that might be left if Iraq’s supply is disrupted. The United States may not only use its Strategic Oil reserve it could also lift the export ban on oil to try to calm global markets and prevent an oil shock that could dive the world back into recession. Bottom line this is the most significant threat to the global oil market we have seen in sometime and we could see prices get close to all-time highs if the fighting continues to spread, not only in Iraq but across the entire region.

Natural gas(NYMEX:NGN14) got a wakeup call as the injection into storage failed to meet expectations and raised doubts about the ability of the market to drive production to levels over usage that will be sufficient to get storage levels to comfortable levels ahead of next winter.

I am quoted by Platts: “The NYMEX July natural gas futures contract closed 25.4¢ higher to a  4.762/mmBtu settlement on Thursday after the U.S. Energy Information Administration reported a lower injection to storage inventories than most expected, prompting fresh concerns about long-term refills. The contract reclaimed the 20.2¢ it lost trading through Wednesday this week and then some. The EIA on Thursday reported a 107 Bcf injection to storage for the week ended June 6, below most analyst expectations ranging from 109 to 113 Bcf. What a difference an injection makes.” I continued, "It's changed the mood of the market. “Once we fall below [storage] expectations, then the big picture begins to come in.”

 When the weather is cooler, we need to see the kind of injections that blow away our expectations, and we just can't see these kinds of smaller injections like today without sparking concerns over the seasonal refill.

 

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