Traders could be underestimating the effect of geopolitical risk on the potential longer-term price application, as the Iraqi conflict between Islamic militants and the Iraq army grew more violent. According to the International Energy Agency, the growing geopolitical risk will pose the greatest threat to the new supply during this decade from any national in the Organization of Petroleum Exporting Countries (OPEC).
Although the majority of Iraq’s oil assets are in the southern part of the country, militants have already captured several cities north of Baghdad and closing in on the capital city. Similarly in the equities markets, traders could be growing complacent, according to several banks, including Citigroup. “The market has worked itself into an extraordinary level of complacency,” said Seth Kleinman, European head of energy at Citigroup.
Near-term contracts in Brent have reached a nine-month intraday high of $115.71 on June 19, but some analysts are forecasting the growing turmoil in Iraqi to threaten Iraq’s production over the long-term outlook. December 2018 contracts were $15.26 less than August contracts,a 9.9 percent increase in the spread. “The reality is that Iraq matters now and, given what a big component it is of global production growth, it matters possibly even more for the future,” said Kleinman.