The Iraq Conflict: The ISIL Takeover and Brent Spread Pricing

The recent string of rebel takeovers in Iraq has affected not only the safety of its people but global energy markets as well. The last week of June 2014 marked a significant date for Brent-WTI spread pricing, as the Islamic State in Iraq and the Levant (ISIL) rebels took over Iraq’s largest oil refinery, Baiji. This refinery produces a third of Iraq’s oil output and has been the scene of a week of fighting between Iraqi forces and Sunni rebels.[i] According to Reuters, as a result of this ongoing conflict, the Brent-WTI spread narrowed to close at $7.31 on June 26 after it had widened to $9.01 last week (its widest point since March 2014).[ii] While United Nations Iraq special envoy Nickolay Mladenov assured oil investors that Iraq’s southern oil fields, which produce 3.3 million barrels (Bbl) per day, remain unaffected, Bloomberg reports that Citigroup Inc. and Bank of America Corp. feel the situation in Iraq will only continue to negatively impact long-term oil pricing. Brent oil for August delivery increased to 4.4% in June on the ICE Futures Europe exchange in London. Citigroup and Bank of America Corp. claim that the violence in Iraq is the biggest risk to new supplies of Brent oil from any OPEC nation.[iii]

Seth Kleinman, European head of energy research at Citigroup, comments: “The market has worked itself into an extraordinary level of complacency. The reality is that Iraq matters for being the second largest OPEC oil producer, and given its production capacity, it matters possibly even more for the future. If the ISIL continue their route toward Baghdad, the chances are greater that rebels could take over the primary oil reserves, where more than 85% of the country’s 3.3 million Bbl/day of crude is exported. Indeed, Exxon Mobil Corp. and British Petroleum have begun removing some employees from projects in the last days of June 2014.”[iv]

Before the conflict escalated, the Brent-WTI spread (represented by the dark grey area in the graph below) for prompt contracts was relatively stable between May 1, 2014 and July 1, 2014 (Figure 1). According to data from NYMEX future settlements, prices for both oil benchmarks started to rise on June 12. In addition, the Brent-WTI spread widened and tapered off toward June 24 (during the time of the conflict). Brent prices spiked more than WTI prices, as Brent is sensitive to geopolitical escalations in the Middle East. ZE’s data management solution ZEMA is capable of tracking these market fluctuations.