US launches airstrikes in Iraq. Oil markets shrug

The US began limited airstrikes against Islamist militants in Iraq Friday in an effort to stem the spread of violence. Despite Iraq's status as a major oil producer, oil markets haven't responded much yet to the renewed upheaval – suggesting that investors have grown accustomed to Mideast turmoil.

The US launched renewed military action in Iraq late Friday, in an effort to slow the rapid advance of Islamic militants. But the tumultuous situation is barely moving global oil prices. That’s something of a surprise, given that unrest in Iraq – OPEC’s second largest oil producer – drove the price of oil to $115 a barrel in June.

So why are prices flat-lining this time, even as the situation in Iraq seems to escalate?

Investors – who panicked and drove prices up in June – may have learned a lesson from the last shock. Prices leveled off after the initial shock, and it is possible they never should have risen so high, analysts say. After all, the oil fields in the north, where Islamist militant group Islamic State (IS, formerly known as the Islamic State of Iraq and the Levant) maintains its choke hold, produce less oil than fields in the Shiite south, where three-fourths of Iraqi crude lies.

In other words, the June fighting in the north had little impact on oil elsewhere in Iraq – and investors think it will have as little impact now, even as violence continues in IS-controlled territory.

“The market’s growing somewhat accustomed to unrest in the Middle East,” says Michael Green, a spokesperson for automotive group AAA.

IS swept into portions of northern Iraq in June, claiming substantial swaths of land and even capturing Mosul, Iraq’s third largest city. And renewed crises have hit the fragile country this week, including IS seizing a strategic Mosul dam.

President Obama gave the green light for US airstrikes in a television address Thursday night, saying limited strikes would protect American personnel in Iraq, and defend the beleaguered Yazidis – an ethnic minority targeted by IS aggression, and driven into the mountains where they are stranded and starving.

 

But oil prices ticked up only slightly yesterday, on the heels of President Obama’s announcement. The airstrikes – which could help Kurds retake the oil fields in the north – may have made the market more optimistic.

US crude oil prices were up 24 cents to $97.58 in late trading Friday. Brent crude – a global benchmark – slid 73 cents to $104.71.   

“I would call it daily noise,” says Tom Kloza, chief oil analyst at gas price tracking website GasBuddy. Kloza adds in a telephone interview Friday that investors are “not inclined, at the moment, to simply pursue higher prices because of violence in northern Iraq.”

If the situation deteriorated in southern Iraq near Basra and its oil fields, prices could conceivably spike, according to Mr. Kloza. “It’s going to take something more than airstrikes in Iraq, Syria, or Libya,” Kloza says.

“In the longer term, the U.S. getting involved is probably bearish for oil because any support the Kurds get increases the probability that they are able to retake the oil fields and territory from the militants,” said James Williams, an economist at Arkansas-based energy-research firm WTRG Economics, in an interview with Bloomberg Friday.

Much of the geopolitical risk bubbling to the surface in Iraq is already included in the pricing of oil, analysts say – and the airstrikes against IS don’t upend that risk calculus.

“When Mosul fell, we saw $7, $8 rallying,” Kloza says. But IS aggression “proved to be a misleading signal” of changes in future oil production and prices. Oil prices worldwide eventually leveled, as the violence in the north had little impact on production elsewhere in the country.

Exploding US production also provides a cushion against foreign shocks to the market, analysts say.

And US consumers have enjoyed the benefits of robust domestic oil production this summer, experiencing a corresponding price drop at the gas pump. Last week, gas prices fell to $3.52 per gallon, according to AAA – the lowest levels since March.