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Explaining The Kurdistan Oil Outage

The oil markets have interpreted the most recent development in the battle between Baghdad and Erbil rather dramatically. Just when it appeared that the new Iraqi government was easing up on the Kurds over their unilateral oil exports, an international arbitration ruling disrupted developments, leading to the shutdown of the pipeline that transports Iraqi Kurdish oil to Turkey.

The oil market response to this loss of 450,000 bpd-from a purely barrels perspective-appears to have been overblown. Normally, 400,000 bpd-only a fraction of Iraq's total production-would not move markets to this extent. However, coming off a mad sell-off amid a banking crisis that many feared could dent demand if the contagion spread, the loss of 450,000 bpd was a promising balancer of prices. The thinking was the 450,000 bpd loss would compound Russia's plans to cut output by 500,000 bpd, possibly through June. However, there is still no data showing this output cut has happened, and it has since been reduced, with Moscow stating that it would be taken from higher February production numbers, rather than January's-as initially stated.

The loss of this production from Iraqi Kurdistan should not be roiling markets to this extent. The exports in question represent half a percent of global supply. True, there is some concern about the medium-term impact on oil companies operating in the KRG-two of whom have already started cutting production because there simply isn't enough storage capacity…

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