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Threats, Markets, Iraq And Oil

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by , 06-13-2014 at 09:04 PM (2247 Views)
Threats, Markets, Iraq And Oil

Global threats are nothing new to markets, but the impact they can have is incredible. Commodity prices can jump quickly, and volatility can drive markets to the point of collapse; as we saw in the global financial crisis. These days, though, threats seem to be few and far between when it comes to markets.

However, one of the largest threats to the markets has appeared this year, in the form of the ISIS in Iraq. Normally I try and avoid threats to markets and the impact they may have - or just include a sentence of two – but in this case I feel it is actually a serious threat to oil markets.

Currently Iraq is going through the process of 'turning on the taps', or basically getting its oil production back into full swing, after a deadly war, followed by civil unrest. So far so good, and things are starting to happen in Iraq, which has the world’s fifth-largest proven oil reserves.

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But the wheels are starting to come unstuck in Iraq and oil production may be severely affected as a result. The ISIS an offshoot of Al-Qaeda and is looking very deadly; they are not led by an ideologist per say, but instead a seasoned battle commander. Hence why they so far have been extremely successful in their ability to move across Iraq and conquer various cities.

In addition to having a heavily armed force, they are not just a terrorist organisation. They act like a state, setting up courts and schools and providing services for the regions that they control. This is not just a side bent on terror, this is an organisation hell bent on conquering the northern part of Iraq and taking vengeance on the current government.

Chances of success when it comes to conquering Baghdad may seem slim, but many have failed to realize the capabilities that they have. After the capitulation in Mosgul, they acquired ammunition and weapons from the escaping army. They are as a result of this now more heavily armed than ever; and in addition to this to they have captured the equivalent ofUS$400 million from the central bank in Mosgul to give them the capital of a small country now.

An escalation in Iraq now seems inevitable, and regional powers are about to get sucked in whether they like it or not. The Kurds are holding their own province in the north, but many see this as a short term move. Long term we could see an Iraq divided by religious grounds, with a north and south much like in the case of Sudan.

This massive build-up of tension will make Ukraine seem like a small problem as Iraq holds a massive oil wealth and sits in one of the world’s most volatile regions. It’s easy to just look at Iraq, but you need to take a look at the bigger picture, and that includes its neighbours like Saudi Arabia, Kuwait, Iran, Syria and Turkey. Many of these neighbours have large reserves of oil and gas and violence can easily spill over borders which are separated by deserts and not by large geographical features.

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I had honestly been expecting a small dip down to the trend line, but the recent escalation of tensions in Iraq will have a major impact. American involvement in Iraq again will also play a big role in oil markets getting even more uneasy, as it’s a sign that things really have hit rock bottom again in Iraq as it cannot control the current insurgency.

The last candle was very aggressive in terms of climbing higher.

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And with the escalation likely to hit critical points in the next 24 hours, expect to see major climbs in the chart with a target of 110, as that is the heaviest point of resistance.

With the current US stance to not act, any relief may come too late to help any assault on Baghdad, what is clear though is that the oil markets have not priced themselves into a civil war in Iraq, especially one that will destabilise all oil production in the volatile region and have an effect on global prices. ISIS is hell bent on exacting revenge on the current Iraqi government and an attack for them would be coming full circle in their campaign - Oil prices will be quick to react to such aggression!

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Tags: gas, iran, iraq, oil, opec Add / Edit Tags