--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 13 Have Asia's oil
buyers and traders become so inured to supply disruptions that
the potential disintegration of the world's fourth-largest crude
exporter barely causes a ripple in regional markets?
The stunning victories of the hardline Islamic State in Iraq
and the Levant (ISIL) in capturing Iraq's second city Mosul and
advancing on the capital Baghdad have grabbed headlines and
moved prices, yes, but do not yet appear to have raised
long-term supply worries.
Global oil benchmark Brent gained 3.2 percent from
June 10 to close at $113.02 a barrel on Thursday, indicating
some level of concern about developments in Iraq.
The key Middle East marker, the Dubai Mercantile Exchange's
Oman futures, rose by 2.8 percent over the same period.
The DME contract is more relevant for Asian crude buyers,
given their reliance on heavier, more sour grades from the
Middle East, as opposed to light, sweet crudes such as Brent.
And with the forward DME curve remaining in backwardation,
it seems evident that there is little concern in Asia that
supplies from Iraq will be at risk in months to come.
The Oman curve <0#OQ:> has steepened at the front in line
with the price increases, but further out it remains in a fairly
normal pattern of mild backwardation, a sign that traders don't
expect significant supply disruptions in the next 12 months.
If they did, the curve would be tending towards contango,
where prices for longer-dated contracts exceed those for
The question is whether the market is correct in being
relatively sanguine about the risks of supply disruptions from
the developing conflict in Iraq.
Certainly the speed at which the ISIL fighters were able to
capture Mosul and move on Baghdad, and the capitulation so far
of the Iraqi army has caught most observers by surprise.
The case for a limited threat to Iraqi oil supplies rests on
the view that the vast majority of its exports come from the
southern part of the country, which is still in government hands
and is home to many supporters of the Shi'ite Prime Minister
This assumes that if ISIL, which aims for a Sunni Islamic
caliphate straddling Iraq and Syria, tries to capture the south,
it will face more serious resistance.
Iraq exported 2.582 million barrels per day (bpd) in May, an
8 percent gain from April but below the government's target for
3.4 million bpd.
That target includes 400,000 bpd from the autonomous Kurdish
region and a northern pipeline to Turkey - although the pipeline
is currently out of commission after being damaged by militants.
The Kurds are also able to ship 100,000 bpd through a
separate pipeline to Turkey, although the Iraqi government is in
dispute with the Kurdish authorities over who has the right to
sell the oil.
The crisis in Baghdad over the threat posed by ISIL may
actually boost oil exports from the north, as the Kurds are
likely to push for, or assume, more independence.
Their forces have occupied Kirkuk, an oil-rich city in the
north of Iraq, and it is possible that the Kurds will seek
control over the currently inoperable pipeline from the city to
Ceyhan in Turkey.
The Baghdad government is probably now entirely focused on
its own survival and is thus unlikely to be able to challenge
the Kurds, or devote time and energy to boosting supplies from
the south of Iraq.
A possible scenario for Iraq is that it becomes a failed
state, effectively split into autonomous Shi'ite, Sunni and
Kurdish areas, with ongoing clashes between them.
Such a scenario is hardly bullish for Iraq's oil exports,
and just maintaining current levels may become a challenge.
SAUDI ARABIA, IRAN THE BACKUP
Thus it will fall to Saudi Arabia, and possibly Iran, to
make up any shortfall to Asian refiners.
The Saudis are still able to ramp up output if needed, but
probably not by enough to handle any major outage of Iraqi
Iran stands as the major beneficiary, assuming it can
negotiate a further relaxation of Western sanctions imposed on
its disputed nuclear programme that are currently supposed to
hold its crude exports at around 1 million bpd.
This level is being breached - with Asian buyers of Iranian
oil importing 1.25 million-1.3 million bpd in the first six
months of the year - although U.S. officials say Tehran is just
inside ambiguous limits placed on its shipments since most of
the overage is condensate.
Iranian Oil Minister Bijan Zanganeh said on June 10 that his
country could raise oil exports by 500,000 bpd "very quickly" if
sanctions were eased further.
So far, Asian crude buyers appear to be adopting a wait and
see approach to the conflict in Iraq, confident that the
beleaguered nation will continue to ship cargoes, and even if it
doesn't, that others can make up the shortfall.
The risk is that while there is still enough oil globally to
deal with any Iraqi disruption, much of it is lighter oil from
the U.S. shale boom, and not the heavier grades preferred by
It's not just that there has to be enough oil to go around,
it has to be of the right type, too, and it's here where the
main risks lie for Asian crude buyers.
(Editing by Tom Hogue)