Iraq's oil supply concerns have come at a worst time, when global growth expectations could cause an increase in Oil demand in second half of 2014, according to Barclays.It pointed out that Iraq is the second largest holder of oil reserves in OPEC and has played a major role in the oil market. In the past nine months , it has become even In the past nine months it has become even more crucial. After raising its production by almost 500k b/d since September 2013, it is now OPEC’s second largest crude oil producer. Even though its output growth has slowed recently, Iraq’s share has continued to rise as production has fallen in other OPEC nations, to the extent that it currently accounts for more than 11% of the groups’ total crude oil output.

Barclays noted that Iraqi central government has reported record Basra loadings in July and KRG leaders claim they could double exports within a month or so to around 250,000 bpd and hit 400,000 bpd by the end of 2014. Despite these developments, ISIS remains a clear and present danger to Iraqi energy sector stability.

A contango situation has emerged in Oil futures with far month contracts rising reflecting the perception of risk in Iraq's long term supply growth, Barclays said.

In the short term the biggest risk in Iraq is a sabotage attack on southern oil facilities resulting in a partial loss of exports. ISIS carried out several hundred sabotage attacks in southern Iraq last year (see Iraq: Off the grid? 19 June 2014) so the southern oilfields are certainly within its reach. In 2011 production at the country’s largest oil field was cut in half by bomb attacks on domestic oil pipelines, resulting in the loss of 700 kb/d of crude for a short while. Even if oil facilities in the south are spared a direct attack, any uptick in violence in the region would likely accelerate the exodus of foreign oil workers from the country, making existing operations more prone to problems and delaying large-scale investment plans further.

Iraq uncertainty and global oil demand growth
Global oil demand growth was sluggish in first half of 2014 at 0.5 mb/day which is the weakest growth recorded since 2009. However a number of factors could push up oil demand in second half and hence the risk from possible Iraq supply disruptions:

-China's economic growth may gain momentum and it has to expand at 9% quarter on quarter to achieve 2014 target of 7.5%
-Oil demand growth in non-OECD is coming from a diversified pool of resources spanning Africa, the Middle East, Latin America and Asia almost equally, which suggest a lower risk of exposure to the economic growth of just one region.
-US oil demand looks extremely healthy with economy set to rebound after Q1 trough. Latest EIA data shows the demand growth for gasoline in January to April.

Barclays has revised its WTI forecast for H2, 2014 to $105 (+$4) and Q4 at $100 (-$1).
Source: Barclays