The True Edge
A Navarik Market Update
After the Kurdistan Regional Government, the semi-autonomous ethnic government in northern Iraq staged what it says was a successful independence referendum, the reaction from neighbours and the international community has been fierce. Turkey, which has territory claimed by Kurdish nationalists and a history of animosity, threatened to close the Kirkuk-Ceyhan pipeline. Iraq has asked foreign countries to block any oil trade with the KRG, and has threatened to seize regional airports. The United States has called the referendum deeply disappointing. The global oil market has a new geopolitical shock, but to begin to analyze the referendum’s effects on the oil market, two facts must be mentioned.
First, neither Turkey nor Iraq has suggested there will be disruptions to Kurdistan’s estimated 400k-600k of daily production, rather exports. Any oil that does not flow over the border into Turkey will be sent south instead. To what extent this diverted route introduces price/margin discounts is unclear. But the barrels will still make it to market, just not in a way that supports the idea of Kurdish independence. This should moderate an apparent assumption in the market that the referendum may reduce the amount of crude oil hitting the market.
Second, Kurdistan has tried to cultivate a reputation for relatively stable governance and economic development in an otherwise tumultuous region. We at Navarik do not presently expect that the KRG would so quickly spend that political capital in unnecessary post-referendum score-settling should Turkey and Iraq follow through on their promises. This would only serve to ratchet up conflict. However, Kurdistan’s supposed validity as an independent state may make the blockades more likely if Turkey and Iraq feel the referendum is a credible risk. In that sense, how closely the threats of retaliation are followed-up should be treated as a leading indicator of the referendum’s likelihood to turn into a wider supply disruption.
The results so far point to a turbulent time ahead, but should not – yet - disrupt the physical market. Expect a brief period of calm before the politics harden into policy. As always, eyes are now back on the future, as we see if this volatility settles or further develops.
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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