The sectarian strife in Iraq has put growth of Opec crude oil production capacity over the next five years at risk, according to the International Energy Agency, highlighting the importance of the country for the global energy market.
Roughly 60 per cent of the growth in the oil-producing cartel’s production capacity up until 2019 was expected to come from Iraq.
“Given Iraq’s precarious political and security situation, the forecast [for Opec output capacity growth of 2.08m barrels a day for 2013-19] is laden with downside risk,” the watchdog backed by wealthy nations said in its annual medium-term oil market report released on Tuesday.
Sunni insurgents from the Islamic State of Iraq and the Levant (known as Isis) made further territorial gains over the Shia-led government in northern Iraq, having already taken the city of Mosul.
The escalating violence has threatened the disintegration of the country and the oil supplies of Opec’s second largest crude producer after Saudi Arabia.
The military offensive “brought home to markets . . . how unstable and volatile the Iraqi political situation remains”, the IEA said of the nation that produces more than 3m b/d.
Iraq had re-emerged as a critical source of oil in recent years, reaching a 35-year high of 3.6m barrels in February. Although Abdul Kareem Luaibi, the country’s oil minister, struck a defiant tone last week in Vienna, analysts say it is unlikely Iraq will hit its 4m b/d production target.
“This offensive is not only raising concerns about future production from operating and new projects, but casting a pall on the functioning of the country’s government institutions and even on regional stability,” the IEA added.
Concerns over Iraqi supply come as fighting in Libya has stalled production while international sanctions against Iran over its nuclear programme have cut exports. Nigerian production has been plagued by theft.
“Political turmoil and security concerns are a growing impediment to supply growth,” said the IEA. “Enough Opec countries are facing headwinds for the output from the group as a whole to be affected.”
Katherine Spector, a commodities strategist at CIBC World Markets, said although oil supplies from Iraq were not at immediate risk as the fighting had not spread to the south – home to three-quarters of the country’s crude output – “we cannot rule out the risk entirely”.
“Even before the violence broke out this was a fairly tightly managed oil market. We were one more supply outage away from sharply higher prices. Although we’re not quite there yet, this is a concern,” said Ms Spector.
The price of Brent crude surged above $114 late last week for the first time in nine months.