Over 500,000 civilians in Iraq have been displaced since June, and after more fighting this weekend, the country looks closer to a breakup than ever.
The Islamic State (IS) captured northern oilfields, two Kurdish towns, and attacked an important dam in Mosul over the weekend. After their initial offensive in June, much of the media attention focusing on the rebellion against Maliki’s government gave way to reports from Gaza and Ukraine.
But after this weekend’s offensive, which adds more valuable territory to the IS conquest, it looks as though we could see the country break apart and watch oil prices skyrocket to new highs.
The rebel militants seized the northern towns of Sinjar, Wana, and Zumar and began patrolling the streets while demanding that any opposed to their rule leave, convert, or be killed. The territory they now hold also includes the Ain Zala and Batma oilfields, which produce around 30,000 barrels per day.
The strangest part in all of this is that both Brent and West Texas Intermediate crude prices were dropping lower on the news. Is the premium on Middle East turmoil finally baked into the market? Some of you might recall back in June, when prices spiked on supply concerns.
Futures Monday morning were at $105 per barrel for Brent crude — the global benchmark — while WTI was at $97 per barrel. Perhaps the Wall Street traders took the morning off, but I could also see the prices rising sooner rather than later as more news from the territory hits the web.
Unlike the previous incursions in Iraq, this weekend’s latest battle sees the Kurdish Peshmerga military force taking its first hits of the crisis.
Although there is widespread belief that the IS offensive is actually helping the Kurds reach independence, it’s clear the militants are hoping to gain more influence over the northeastern part of Iraq.
Moreover, the Kurds’ problems have compounded after losing 30,000 barrels per day to their daily production, along with the recent seizure of one of their oil shipments.
Of course, another important factor is what happens to the Mosul Dam. The dam is a key part of the region and could have dire consequences for Kurdish oil production if it falls completely under IS control.
That’s also not to mention that much of the surrounding land and the Kurdish citizens rely on the dam to prevent flooding, which could have a devastating effect to the area.
The bottom line for us is that the drop in WTI crude was a bit overdone, and there is still plenty of volatility in the Middle East. Our focus, as always, should be on the areas that are actually capable of boosting production over the next few years…
South Texas is a perfect place to start.