Goldman Sachs said that while oil output from the Kurdistan region was potentially at risk due to a standoff with Iraq, tensions between the United States and Iran remained a larger and longer term threat to global supply.
A risk premium has returned to oil markets, boosting global prices as escalating fighting in Iraq threatens supplies while political tensions loom between the US and Iran.
“In the case of Iran, there are likely no immediate impacts on oil flows and there remains high uncertainty on potential reintroduction of US secondary sanctions. If they are, we expect that several hundred thousand barrels of Iranian exports would be immediately at risk,” the bank said in a note.
Last Friday, US President Donald Trump refused to certify Iran’s compliance over a nuclear deal, leaving Congress 60 days to decide further action against Tehran.
However, without the support of other countries, it appears unlikely that production would fall by 1 million barrels per day to the levels before Western sanctions were imposed on the country, Goldman said.
“In the case of Kurdistan, the 500,000 barrel-per-day (bpd) Kirkuk oil field cluster is at risk with initial reports that 350,000 bpd has shut in, although this remains unclear,” the bank said.
However, both the low production costs and high revenue per barrel could prompt both sides to keep oil flowing, it added.
“Yet, this does not rule out sustained production disruptions as we note that Iraq has less downside risk (given its southern exports) than KRG (Kurdistan Regional Government) if flows to Ceyhan (in Turkey) are interrupted and global oil prices rally.”
On the likely impact on prices from the intensifying geopolitical tensions, the bank said a 500,000 bpd outage for three months, or a six-month long 250,000 bpd outage could push oil prices higher by $2.50 per barrel.
“The limited market response so far is therefore consistent with the high uncertainty on potential production disruptions, with larger moves only likely to occur should new disruptions actually occur, in our view.”
The price response to these potential disruptions could cause greater Brent backwardation and new outages could fast-forward the normalisation of excess global stocks, the bank noted.
Backwardation is a market condition in which prices for immediate delivery of a product are higher than those later on.
The increasing geopolitical risks, combined with better demand and compliance with an OPEC-led deal to curb production, posed risks to its year-end $58 per barrel forecast for 2018, it added.