Crude risk premium returns on Kirkuk crisis

A risk premium has returned to oil markets, boosting global prices as escalating fighting in Iraq threatens supplies while political tensions loom between the United States and Iran.

After months of range-bound trading during which Opec-led supply cuts supported crude prices but rising US output capped markets, prices have moved up significantly this month just as demand looks stronger than at any point in recent months, especially in China.

Despite some profit-taking earlier yesterday, Brent crude futures were still at US$57.82 at 05.11 GMT, 2.5 per cent higher than last Friday’s settlement – and almost a third above midyear levels.

US West Texas Intermediate (WTI) crude futures were at $51.78 per barrel, down slightly from their last settlement, but still some 2 per cent higher than last Friday, and almost a quarter above mid-June levels.

The higher prices came as Iraqi government forces captured the major Kurdish-held oil city of Kirkuk on Monday, responding to a Kurdish independence referendum. There were also reports that Kurds had shut down some 350,000 barrels per day (bpd) of production from major fields Bai Hassan and Avana because of security concerns.

“In the case of Kurdistan, the 500,000 bpd Kirkukoil field cluster is at risk with initial reports that 350,000 bpd has shut in, although this remains unclear,” Goldman Sachs said yesterday.

The escalating fighting in Iraq has spooked markets as it adds to rising tensions between the US and Iran. Last Friday, the US president Donald Trump refused to certify Iran’s compliance over a nuclear deal, leaving Congress 60 days to decide further action against Tehran.

During the previous round of sanctions against Iran, some 1 million bpd of oil was cut from global markets.

“If there are [new sanctions], we expect that several hundred thousand barrels of Iranian exports would be immediately at risk,” Goldman said.