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Kerry, Saudi King discuss oil supply, says US official ‘Concerns in market will ease once a more inclusive Iraq govt is formed’

SHANNON, Ireland, June 28, (Agencies): US Secretary of State John Kerry and Saudi King Abdullah briefly discussed global oil supplies during a meeting on the crisis in Iraq on Friday, a senior State Department official said. During the talks, Kerry referred to recent comments by a Saudi oil official that the world’s largest oil producer would increase supplies should crises in Iraq or Syria disrupt supplies, the official said. “The secretary noted positively a recent statement from an oil official in the kingdom reflecting the kingdom’s desire to do what will be required in the event of any turbulence,” said the State Department official, who briefed reporters on the talks. The official said Kerry believed the Saudi official’s comments were “constructive.”

US officials have expressed the belief that concerns in oil markets will ease once a more inclusive government is formed in Baghdad that can deal with a Sunni insurgency threatening to break apart Iraq.
Saudi Arabia was Kerry’s last stop in a week-long tour of capitals in Europe and the Middle East, which included a visit to Baghdad, to address the crisis that threatens to tear apart Iraq. The United States wants the Saudi Arabia to use its influence among fellow Sunnis in Iraq to press them to join the new government. Brent crude oil was little changed in trading on Friday following one of the international benchmark’s biggest weekly falls this year due to reduced concerns over exports from Iraq.


Prices have dropped more than $2 from a nine-month high of $115.71 hit on June 19 as output from Iraq’s southern oilfields, which produce most of that nation’s 3.3 million barrels per day (bpd), remained unaffected by fighting in the north and west.

Record
Oil markets have staged only a muted reaction to the bloody insurgency gripping OPEC’s number two producer Iraq, but analysts warn any disruption to supplies could push prices to record peaks. The offensive led by the Islamic State of Iraq and the Levant (ISIL) that has swept through the north of the country and is now threatening to rip Iraq apart has sent prices to nine-month highs but they remain $30 below the peaks hit in 2008. “This contrasts with the period of civil war in Libya in early 2011 that halted production. Back then, oil prices, volatility and skew all reacted far more aggressively,” said BNP Paribas analysts Harry Tchilinguirian and Gareth Lewis-Davies.

“The reason for the orderly advance this time is simple: we have not had an actual supply disruption.” Brent oil has risen by only 6.0 percent since the beginning of the latest crisis in Iraq to a high point of $115.71 in the middle of June. The price had surged by almost 35 percent in 2011 to a high of $127.02.
Another example is the 16 percent the European benchmark jumped in a month to $128.40/bbl when the EU imposed an embargo on Iranian oil at the end of January 2012. In Dubai, oil futures have even turned bearish, dropping a fifth from their May peak as traders fret about what impact the crisis in Iraq could have if it spills into the broader region.

“With the exception of the first couple of days following the onset of the Iraqi crisis, oil markets have remained admirably calm,” said analysts at PVM. That is mainly because there has been little actual disruption to exports from Iraq so far. Insurgents have forced the shutdown of the country’s main oil refinery but have not managed to break into the key Kirkuk oilfield in the autonomous region of Kurdistan or hit the main oil fields in the south. OPEC’s second-largest supplier produces around 3.3 million barrels of crude a day (bpd) and exported around 2.6 million in May — less than the 3.52 million bpd the IEA estimates the cartel could produce if needed.

Commerzbank argues any real disruption to exports is “very unlikely” as the militants are unlikely to make any real headway in the Shiite-dominated southern regions, which account for 90 percent of exports. “It is first and foremost the fear of disrupted supply in Iraq that is causing the risk premium on the oil price to rise,” said analysts at the bank. “Assuming — as we expect — these interruptions fail to materialise, the oil price is likely to shed its fear-driven gains again, just like it did in the late summer of 2013, and to fall back to below the $110 per barrel level.”

Still, as Abhishek Deshpande at Natixis argues, any substantial reduction in shipments “could take global spare capacity dangerously close to zero” and so push prices to above $120/bbl. The problem could be particularly acute in the summer, when the 12-nations in OPEC tend to have less spare capacity due to higher demand, and so could force the IEA to release stocks to calm world markets as it has done in the past. “Events in 2007-8 are clearly our closest guide to how high prices could go in such a scenario,” said Deshpande.

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