This New Oil Crisis Could Set the Middle East on Fire

After over 40 years in the energy business, more than two decades of that with a parallel career in intelligence, I regularly witness the impact of global developments on the energy markets.

So it's hardly surprising that I often address geopolitical events here in Money Morning and Oil & Energy Investor.

Currently, situations in Latin America (Venezuela), Asia (the South China Sea crisis), and Africa (ongoing civil conflict in Libya and Nigeria) show how widespread the geopolitical impact is on energy prices and availability.

Each one either is, or could easily, spike oil price volatility.

But the instability in a different region remains the biggest single factor in how the two sectors interact...

The Middle East.

There, two significant events unfolded over the past week. Each is certain to have an impact on how crude oil trades in the near term.

The curious decertification of JCPOA (the Joint Comprehensive Plan of Action, more popularly known as the "Iranian nuclear accord") by President Donald Trump was followed in short order by the ominous hostilities between Iraq and Kurdistan over the status of the city and region of Kirkuk.

Both impact the northern Persian Gulf, already a region with a short fuse.

The toppling of Raqqa, the self-styled ISIS capital, may be underway in Syria, but the ongoing cross-border disagreements have already spread elsewhere.

And they could set the whole region on fire...

Sanctions Don't Work Very Well

First, take the Iranian nuclear deal. Decertifying it was a curious choice by the White House, as it actually accomplishes very little.

The move kicks the can back to Congress, where the legislative branch has 60 days to decide whether the United States remains in the accord.

What it does do, of course, is increase volatility.

Any attempt to resume economic actions against Tehran will have an effect on oil prices.

Put simply, there is no indication OPEC will be relaxing its cap on production, while renewed U.S. sanctions will almost certainly reduce Iranian exports.

When the conversation moves to economic sanctions, I have noted previously that I have some personal knowledge of the matter. In an earlier period of my life, my portfolio included the design and running of such U.S. reprisals in several parts of the world.

One thing I learned was the limited impact of such moves.

Public opinion still holds that economic sanctions can bring a nation to its knees. Unfortunately, that is not the case.

Such weapons tend to hurt the poorest residents of a target country, while resolute central governments there remain unrelenting.

Massive economic sanctions did not prevent Japan from attacking the U.S. and pulling it into World War II, nor did they dissuade Saddam Hussein, or for that matter prompt Tehran to stop its nuclear program prior to the negotiation of JCPOA.

They will not have a better result this time.

That's because every one of the other signatories to the accord (Russia, China, the UK, France, and Germany) have certified that Iran is abiding by the agreement.

Any move to resume U.S. sanctions will have limited impact. This time around, all the other nations involved will not agree to comply with them, giving Iran a way around American sanctions.

Now, Congress passed an ancillary piece of legislation, not part of the JCPOA itself, asking the president to periodically certify whether Iran is abiding by the deal. And last time it came up - earlier this year - even President Trump certified that Iran was in compliance.

In any event, nothing has happened in the past six months to change that assessment. Now, the White House and some in Congress would like the accord to include restrictions on Iranian support of outside groups and a prevention of further ballistic missile development.

These are objectives worthy of consideration.

But no nation can retroactively (and unilaterally) decide to add elements to an already approved international agreement.

These matters, while important, have nothing to do with certifying JCPOA. They are simply not a part of that deal.

Last week, I provided a comment from a Russian colleague that deserves repeating: "One does not improve the trade in oranges by adding apples."

Dr. Moors providing a keynote address to the Iranian Summit held in Frankfurt earlier this year.

On each occasion when I meet with officials and leaders of the Iranian energy sector, I have two reactions.

First, there is a window of opportunity allowing some possible joint endeavors of benefit to both sides.

But second, Iranians will not be pushed into a corner and cry "uncle."

It reminds me of one of the pieces of advice I would regularly give my graduate students in my tenure as a university professor: "Learn to work successfully with people you happen not to like personally."

As Congress deliberates over the next 60 days on whether to maintain American involvement in the JCPOA, uncertainty over Iranian export flows should result in the oil pricing floor slowly rising, as the market is already approaching a balance between supply and demand.

The other issue - the blowback against the Kurdish move to independence - is far more recent and more serious...

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The Kurdistan Crisis Is Already Limiting Oil Supply

A few days ago, Iraqi military forces supported by Shiite militia took over the northern city of Kirkuk. This puts Baghdad and the Kurdistan Regional Government (KRG) in Irbil in a direct armed conflict.

Kurdistan remains nominally a part of Iraq. It has had a semi-autonomous status for several years, but the overwhelming "Yes" vote in last month's independence referendum there has ushered in a new crisis.

Today, Kirkuk is not part of Kurdistan, but it is the traditional capital of the Kurdish people.

Kurds remain the largest ethnic group in the world without their own country. The preponderance of that population lives in northeastern Iraq, northwestern Iran, and eastern Turkey.

In other words, in what is probably the most sensitive area in the region.

The Kurds have been contending with Baghdad, Tehran, and Ankara ever since Saddam was toppled from office. Matters have now reached a dangerous level.

At issue right now are the primary oil-producing areas surrounding Kirkuk, as well as the Kirkuk-Ceyhan pipeline to southeastern Turkey - the primary northern Iraqi crude oil export avenue.

The area surrounding Kirkuk provides a shade more than 40% of all Iraqi oil production. Some of that has been effectively "acquired" by Kurdistan, while other oil and natural gas fields exist that are squarely within territory administered by the KRG.

Thus far, in the less than 72 hours following the Iraqi military move, about 450,000 barrels a day of production have been lost to the market, all from KRG-controlled fields.

Meanwhile, as contacts in the KRG Ministry of Natural Resources, Iraqi Ministry of Petroleum, Iranian Ministry of Petroleum, and Russian Ministry of Energy (Minenergo) confirm, Kurdistan has become the target for accelerating foreign interest.

I advised the KRG Ministry in designing the Kurdish Oil Law and Model Production Agreement, as well as the Iraqi Ministry of Petroleum in the revisions of Iraqi regulations on field development. The KRG has provided a better approach for foreign companies. That has resulted in some international majors, led by Exxon Mobil Corp. (NYSE: XOM) and Total SA (NYSE ADR: TOT), to forego contracts in Iraq proper and move to Kurdistan.

All of this has put an outside emphasis on securing agreements with the KRG. The new conflict merely accentuates the pressure.

I had advised private clients since July of this year that the winding down of military operations against ISIS - a cause in which Baghdad, Irbil, and Tehran were "allies" - would result in a heightened rift between the Kurds and the Iraqi central government.

The vote for Kurdish independence was the first wave. Military confrontation has been the second.

I next meet with Kurdish officials in early December, although meetings with both Kurds and Iranians are now shaping up for next month. It's a comment on the uncertain times that the former will be held in London while the latter takes place in Paris.

As always, you'll be getting the scoop on those meetings and what they mean for energy markets and investments in Oil & Energy Investor.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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