The actions of the Sunni group known as ISIS in Iraq could have a significant impact on the price of oil in the United States in the second half of the year.
The unstable situation is causing concern among some energy analysts, since the group could potentially take control of a large chunk of the world’s oil supply.
“Current oil production in Iraq of perhaps 3.25 million barrels per day includes roughly 150,000 b/d in the central region, which will likely be totally disrupted,” said Michael Underhill, chief investment officer at Capital Innovations LLC in Pewaukee. “The 700,000 b/d production in the north and 2.4 million b/d in the south, however, should be unaffected, provided the conflict does not expand seriously either through Baghdad or into Kurdistan. The immediate effect on oil supplies will therefore be the loss of 150,000 b/d.”
Ethan Bellamy, managing director at Milwaukee-based Robert W. Baird & Co. Inc., expects oil prices to hit $105 to $115 per barrel in the second half of the year.
“We would expect continued prices around the current level, unless there’s a significant lessening in geopolitical tensions, specifically Iraq,” Bellamy said. “If (ISIS is) successful in taking over Iraq, then that puts us in the position of having to send troops back in, which we don’t want to do, partner with Iran, which we are loathe to do, or sit back and watch them take over 3 million barrels per day of production.”
It’s possible the situation in Iraq could result in unhindered exports from Kurdistan of about 150,000 barrels per day, so there may be only a modest impact on U.S. supply of about $5 per barrel, Underhill said.
Another factor is the increasing U.S. production of natural gas, which is rising at a pace that would make it a net exporter of oil and gas by 2020, producing about 22 million barrels of oil per day, he said.
“The U.S. right now is … about 63 percent energy independent,” Underhill said. “When you look at America’s newfound abundance of oil and gas, it’s a complex game of chess.”
In fact, if geopolitical tensions decrease and U.S. oil production increases, oil could drop to $90 per barrel, Bellamy said.
“There’s also a very bearish case for crude oil, which would be good for the economy, because we are definitely oversupplied in the U.S.,” Bellamy said. “Most of the OPEC production growth is slated to come from Iraq, so the really political decisions in D.C. and Baghdad are, I think, going to be responsible for a $15 per barrel swing in oil in either direction.”
That swing could impact consumers during the busy travel season.
“Consumers will continue to see gas increase in price as we’re seeing slow GDP growth, increase in consumption of energy, oil and gas products due to a slowly increasing economy,” Underhill said. “As you see, transportation has picked up. That will lead to continued consumption of oil and gas products, particularly when you look at gas at the pump.”
