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Gas Prices Soar, But Have Probably Peaked For Now

By Nick Cunningham | Thu, 03 July 2014 21:07 | 0

As Americans head into their July 4 holiday weekend, gasoline prices are at their highest levels for this time of year since 2008.

The surge in prices is a direct result of recent turmoil in Iraq. The good news is that prices may have peaked for now, as tensions have eased. Barring any new unforeseen geopolitical flashpoints, oil prices could have reached a temporary peak, and prices could come down in the weeks ahead.

There are multiple reasons for the improved outlook. First, the unrest in Iraq has leveled out for now, with ISIS militants having been stopped short of Baghdad. Much of Iraq’s oil production remains safely removed from ISIS controlled territory. About three-quarters of the 3.2 million barrels per day (bpd) of production is concentrated in the south, where there is little prospect of an ISIS invasion.

Another 700,000 bpd of production lies in the north, where Kurdish forces have fortified their defenses against any incursion by ISIS. Kurdistan has even succeeded in unilaterally selling its oil (despite protests from Baghdad).

As the markets became more confident that the disintegration of Iraq along sectarian lines has thus far not affected oil production, the rally in prices has come to a halt.

Now, oil markets finally have a bit of good news coming their way. The Libyan government has finally retaken control of its two major oil export terminals after coming to an agreement with separatist rebels in the eastern part of the country. The two terminals – Ras Lanuf and Sidra – were held by the rebels for months, cutting off most of Libya’s oil production since last summer.

After several false starts, the political deal between the two factions may finally lead to the restoration of Libyan oil shipments. Acting Libyan Prime Minister Abdullah al-Thani held a joint press conference with rebel leader Ibrahim Jathran to trumpet the settlement. “Today we regained control of the ports at Ras Lanuf and Sidra.” al-Thani said. “We have successfully reached an agreement to solve the oil crisis.”

With the government now in control of the two major ports, an estimated 500,000 bpd of oil production can quickly be brought back online. Eventually, oil traders hope, Libya will be able to build back its oil capacity to what it was before – around 1.5 million bpd.

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Finally, negotiations over Iran’s nuclear program have resumed once again, with a deadline for a deal set for July 20. This is the sixth and final round, and despite the warmer relations between Iran and the West over the past year, inking a comprehensive deal will be exceedingly difficult.

Nevertheless, both sides have enormous incentives to reach an accord. If they can, some of Iran’s oil production could eventually be restored. Iran has seen its oil exports slashed from 2.5 million bpd down to only 1 million bpd because of Western sanctions. The market has been able to absorb that loss without too much trouble, but with the latest violence in Iraq, the West feels some added pressure to reach a deal with Iran in the event that an ISIS advance threatens Iraqi oil output.

Just a few weeks ago, a sense of despair struck the oil markets. Oil prices shot up as multiple geopolitical crises conspired to tighten supplies. All of a sudden, things are looking much better, at least for the short-term. Spot prices for the international oil benchmark Brent hit a high of $115.19 per barrel on June 19, and have since fallen back to $110 during midday trading on July 3. WTI prices have also come down from about $107 per barrel in late June to $104 by early July.

The outlook over the long-term, however, still remains grim, as increasing demand runs up against flat supplies. Iraq, in particular, should be a major source of worry. In the short-term, its oil sector may avoid the worst of ISIS, but over the long-term, the country is much less likely to fulfill the expectations the world has placed upon it. The IEA expects Iraq to double its oil production to 6 million bpd by 2020, which is looking increasingly like a fantasy.

Still, in the short-term, oil markets are breathing a sigh of relief, as the worst may be over for now.

By Nick Cunningham of Oilprice.com

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Nick Cunningham
Company: Oilprice.com

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