Uncertainty looms large in oil complex following escalation of tensions in Iraq with Al-Qaeda-linked groups seizing control of large parts of Mosul, Iraq's second largest city.Barclays Research said in an update that the big question for oil sector in Iraq is whether extremist groups will seek to expand their attacks from the Kirkuk-Ceyhan pipeline to other energy infrastructure.

On the New York Mercantile Exchange, West Texas Intermediate Crude Oil for delivery in July traded at $104.32 a barrel, down 0.03%, after hitting an overnight session low of $104.04 a barrel and a high of $105.05 a barrel. Brent oil on the ICE futures exchange fell 0.4% to $109.52 a barrel.

The situation is extremely fluid, the Islamic state of Iraq ans Syria has overrun the military bases, seized the headquarters of provincial governor, and sparked a mass exodus of civilians out of the besieged city, with extremist groups carrying out multiple bombings across the north of the country, resulting in hundreds of causalities.

The Iraqi tensions have a high bearing on crude oil market with Libyan production looking set to be offline for a significant period, and the return of Iran's sanctions-restricted barrels likely to be be slow.

Barclays further noted: Iraq’s northern energy infrastructure has been a target of insurgent attacks, with the 600 kb/d capacity Kirkuk-Ceyhan pipeline repeatedly bombed by insurgent groups. The security situation is thwarting repair efforts, given the pipeline’s proximity to ISIS strongholds in Anbar province. With no immediate end in sight to the violence in the north, we do not expect that pipeline to be operational on a sustained basis anytime soon.

A big question for the Iraqi oil sector is whether groups like ISIS will seek to expand their attacks to other energy infrastructure. While these groups have not to date specifically targeted any southern energy facilities, they have carried out periodic bombings in and around the Basra area in the past year. Thus, the south of the country is not beyond the geographic reach of extremist groups seeking to foment civil unrest and put pressure on the Maliki government. The heightened level of violence in Northern Iraq also places KRG exports via truck and pipeline at risk; additionally, the lack of Kirkuk exports has cut Iraqi budget revenues by 10%.

Thus, Barclays believes at a minimum that the Maliki government, which is trying to cobble together a governing coalition, will be hard pressed to devote funds to complete vital oil infrastructure upgrades when it must devote ever-increasing resources to stem the security threat posed by the renewed Sunni insurgency.
Source: Barclays Research