Higher Oil Prices Are On The Way

by Dan Dicker, Oil & Energy Insider: For the last week, I had viewed the relative complacency of the oil markets to the latest struggles for control of Iraq as the correct response. But now, I’m starting to doubt it. I believe this rally has only begun and we will see much higher prices soon.

Several factors have changed my view. First, I was less than impressed with the quick progress that ISIS had made in capturing several cities in the Northern areas of Iraq. After all, these were naturally Sunni majority areas and most of the inhabitants of those cities were at least inclined to let the ISIS forces come in, having been marginalized by the new, Shia-led Al-Maliki government in Baghdad. Indeed, I believed that the quick progress and lack of resistance from Iraqi security forces were a combination of failed training and utter surprise at the raids’ speed. It was distressing, I thought, to see the US-trained Iraqi army drop their weapons and run, but I did not expect these radical forces to continue to control these cities after the shock had worn off and a counter-attack could be organized.

Plus, it was clear that these Sunni areas did not approach any of the most vital oil producing centers that had been exporting upwards of 3.5 million barrels a day. Even in the North, the one superfield in Kirkuk was strongly in Kurdish hands and very unlikely to fall to the Sunni militants. These facts had allowed oil to rally almost lackadaisically, to $106.

Smart markets? I’m no longer so sure.

The second week of fighting is telling me a different, more dire long-term story. While it is true that ISIS forces have only made progress in Sunni majority territory, no counter attack has come from the Iraqi government. Indeed, the Al-Maliki government has been begging for US support logistics and bombers (after kicking US forces out of the country in 2012) while nervously constructing defenses at the border to Baghdad.

These ISIS forces are not looking like a small, ragtag group and short-lived problem. They are now very well funded, both by the central bank that they captured in Mosul with its estimated $400m in reserves, by their control of Syrian oil production and by various Saudi sources. They have arms, and US arms, courtesy of an abandoning Iraqi army. And they have conviction, which comes from zealous Islamic adherence to their goal of creating a new, Sharia-law caliphate throughout the region. Their brutality was proven with their self-publicized slaughter of an estimated 1500 Iraqi soldiers. With money, arms and viciousness, this does not look like a group that is going away anytime soon.

It is a wider geopolitical reality that the results of the Arab Spring are giving way to stronger Islamic radical groups; not just in Iraq and Syria, but in Libya and Tunisia and Egypt. Where governments have fallen, moderate Islamists have been overrun by radicals, in almost all cases. This is a worrying trend, to say the least, but also portends serious stability problems to come in many of the oil-producing nations of the Middle East, not just Iraq.

And that means that oil is headed higher. As these radical elements gain influence and territory, they embolden other radical groups in other nations to also destabilize where and when they can. It is no wonder that every established government, including Iran and Saudi Arabia and even Hezbollah and Hamas, are fearful of these terrorists.

They have money, guns and conviction. And with ISIS, they are starting to build momentum.

This looks to be a very long fight ahead indeed.
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This article is via Oil & Energy Insider,  a report provided by the editor of  OilPrice.com to the ARRA News Service. Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil futures contracts.

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