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Iraq’s Disintegration and What it Means for Oil Markets

Another week, another geopolitical flashpoint affecting global oil markets. This week saw the takeover of Mosul, Iraq’s second largest city, by an insurgent Sunni group bent on erasing the borders between Syria and Iraq. At the time of this writing, the militants had swiftly moved on and took Tikrit and were on the verge of capturing Samarra – putting them within striking distance of Baghdad.

Known as the Islamic State of Iraq and Syria (ISIS), the group was battle-hardened in Syria and has been festering in western Iraq for more than a year. The Iraqi government should have seen it coming, after ISIS took over Ramadi and Fallujah at the beginning of 2014. But they didn’t, and now ISIS militants are waving black flags over Mosul. They took officials from the Turkish Embassy hostage and the Turkish government issued a clear threat that they would retaliate if any Turkish nationals were harmed.

For the entire second quarter of the year, energy watchers have been busy talking about Russia, Ukraine and what the ongoing conflict in Eastern Europe will mean for natural gas markets. Attention will surely shift to the troubled Middle East, where market analysts have yet to come to grips with how important Iraq is for global energy markets – and how truly unstable it is at this point.

Iraq is OPEC’s second largest producer. It produces 3.3 million barrels per day (bpd), which accounts for over 3.5% of global supply. Iraq has the fifth…

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