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The good, bad & ugly: three oil scenarios as Iraq crisis mounts

by Dylan Lobo on Jun 23, 2014 at 10:25

The good, bad & ugly: three oil scenarios as Iraq crisis mounts

Oil prices touched nine-month highs last week as the crisis in Iraq escalated.

The militant insurgency in northern Iraq has triggered fears of a supply shortage in the country, which is the second largest producer of crude in the Organization of The Petroleum Exporting Countries (Opec).

A barrel of Brent crude is now trading at around $115, rising from the $109 it started June on.

Capital Economics points out that thus far the Iraq crisis has only had a limited impact on the global oil market, given it is trading $5 above the level it hit when the 'Arab Spring' erupted in early 2011.

Capital's head of commodities research, Julian Jessop, said the muted response made sense as most of the fighting is contained to the north of the country, well away from the main oil facilities in the south.

Jessop believes the most likely outcome is a benign one, with the oil price dropping back below $100 per barrel within the next six-12 months.

While he does not expect the crisis to have any meaningful impact on the oil price over the long term, he is conscious that there are several scenarios which could play out.

The good

An improvement in the security situation across the Middle East should allow the oil price to drop below $100 within six to 12 months.

Jessop points out that there is even a chance the crisis could result in even lower prices.

'US intervention appears to be conditional on the Iraqi government doing more to ease sectarian tensions, which could prove a model for the rest of the region,' Jessop said.

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