Iraq Is In Turmoil - Oil Markets Daily

| About: The United (USO)


Iraq is in trouble.

Nearly 5% of the world's oil supply is in political turmoil.

Market participants are heavily discounting the situation in Iraq.

Iraq is in crisis mode. Oil (NYSEARCA:USO) market participants don't seem to care as Iraq is producing a "record" amount of crude and exporting it faster than it can pay its workers.

The bear thesis on oil staying lower for longer assumes that there are no permanent worldwide oil supply outages. Despite what skeptics have been saying, the contrary theme has played out throughout 2016.

A black-swan event in Canada made everyone wake up to the grim reality that a world with no spare capacity could easily change into a shortfall in oil, rather than a surplus. Oil prices are very sensitive to potential supply disruptions, and despite trading at a "shortage potential premium" for the last decade, market participants don't care anymore as long as there's enough in the storage tanks. This reminds us of an irresponsible teenager with just enough money in their bank account and who starts to spend recklessly. Oil market participants should take notes.

The situation in Iraq is getting worse. Protesters stormed the green zone again, and this time, several people were wounded by gunshots. The protesters are outraged by the government's lack of reform and declining oil revenue. Workers have been laid off and government salaries have been cut. Oil companies have been given stingy budgets, while the government demands production increase. Iraq is like a person with a 450 credit score trying to get another credit card. IMF has recently agreed to give it $5.4 billion, and we suspect that will be barely enough to pay back the other debtors. Iraq is in dire need of oil prices going up, but its record production isn't helping the situation.

We think the political turmoil there is heavily discounted by market participants. While everyone's attention remains focused on the U.S., we think it's countries like Saudi Arabia, Venezuela, Nigeria, and Iraq that need more attention. Collectively, these four countries produce nearly 20 million b/d, or more than 20% of the world's supply. Any permanent outage issues with any of these countries could spell a shortfall in supplies for many years to come.

We remain bullish on oil prices as WTI approaches $50. We continue to believe prices will be $60-plus by year-end.

Other Energy News

  • Nigerian production remains offline as militants threaten oil companies. Bloomberg reported on how money was used to buy the militant's allegiance.
  • Rig counts remains unchanged, and we expect rig counts to bottom out over the next several weeks.

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