FUTURES - Refinery In Flames

By Phil Flynn / Senior energy analyst at The PRICE Futures Group and a Fox Business Network

June 18, 2014


While Iraq's oil exports surge the fall of the Baiji Refinery is to ISIS terrorists is not providing any comfort to
the global market. The refinery which supplies Bagdad with gasoline and diesel shows that the situation in Iraq
is not getting better. Oil companies are pulling out nonessential personnel even in the south of the country
where at least so far things are relatively held. Oil (NYMEX:CLN14) companies are trying to export while the
exporting is good yet the possibility of an oil shock is rising the south of Iraq starts to fall. While reports by the
Energy Information Administration showing that North Dakota oil output hit a record 1 million barrels a day,
will the Fed acknowledge the risk and signal a pause in the taper if things get worse? Or will it be oil prices
spikes are transitory? In the meantime oil and products are back on the rise.

While the Iraqi Army tries with some success to defend Baghdad, President Obama decided against immediate
airstrikes allowing Sunni extremists to continue to commandeer U.S. military equipment and execute captured
soldiers. Dow Jones reported that parts of Iraq's main oil refinery were in flames Wednesday as government
forces fought to repel militants who gained partial control of the oil facility, Iraqi security officials said. Sunni
militant fighters behind a week-old offensive that has claimed several major cities and towns in northern Iraq
attacked the refinery in the northern city of Baiji overnight and seized part of the installation, an oil ministry
official in the country's north said. The official said employees fled the refinery as it came under attack, the
latest in a weeklong siege of the oil hub. The fighting over the main source of Iraq's refined fuel for its
domestic market doesn't affect production or exports from the country's chief oil fields and facilities in the
south, where militants haven't reached.

In the southern parts of Iraq its business as usual. Bloomberg News reported that Iraq's oil exports from its
southern terminals in the Persian Gulf are poised to surge at a time when fighting has plunged the country's
north into chaos and Islamist militias are advancing toward Baghdad. Exports of Basrah Light Crude, the
country's main grade, may reach about 2.8 million barrels a day next month, according to a preliminary loading
plan obtained by Bloomberg News yesterday. That's 11 percent more than this year's average and would be
close to a three-decade high of 2.799 million barrels that Iraq said were exported from all its ports each day in
February. OPEC's second-largest producer shipped 5.43 million barrels from Basrah on June 11, Iraqi Oil
Minister Abdul Kareem al-Luaibi said in Vienna the next day.

Yet can that continue if Bagdad is staved of oil products and cities continue to fall. Baghdad citizens may lose.
In the mean-time the Kurds are taking full advantage of this. While watching the Iraqi oil fall apart the Kurds
moved in and took over oil and production facilities.

Reuters reports that Iraqi Kurdistan has built a link connecting Kirkuk to its newly-built pipeline to Turkey, its
minister of natural resources said, potentially cementing Kurdish control over the northern oil hub and
reducing its reliance on Baghdad. The link could allow the Kurds to start exports of Kirkuk crude oil through
their own network, giving them a major source of independent revenue and boosting any ambitions of
sovereign statehood as Iraq falls into increasing disarray. The new link connects Kirkuk's Ivana dome to the
Khurmala dome out of which the Kurdish pipeline runs. "That blue line was finished," Ashti Hawrami, the
Kurdistan Regional Government (KRG) minister for natural resources, told a conference in London, pointing
to a map of the pipelines.

Baghdad's military retreat from the north under a lightning assault led by the Islamic State of Iraq and the
Levant (ISIL) last week allowed the KRG's Peshmerga forces to seize control of long-disputed Kirkuk and its
oil reserves - the potential economic lynchpin of a sovereign Kurdish entity. But the main 600,000 bpd Kirkuk
pipeline, which accounted for the bulk of Iraq's northern crude oil exports, has been offline since March
following insurgent attacks. Attempts to repair it have been thwarted by Islamic militants in the region, who
have targeted engineers trying to fix sections of the line that pass through territory outside KRG control. With
Baghdad busy fighting ISIL, the Kurds are pushing ahead with oil exports that could help bolster their
autonomy. Oil exports will increase to 200,000-250,000 barrels per day in July, and then to 400,000 bpd by the

What is more in a stunning development, Turkey may for the first time ever support a Kurdish state. Ryan
Grim reported that "In a statement that could have a dramatic impact on regional politics in the Middle East, a
spokesman for Turkey's ruling party recently told a Kurdish media outlet that the Kurds in Iraq have the right
to self-determination. The statement has been relatively overlooked so far, but could signal a shift in policy as
Turkey has long been a principal opponent of Kurdish independence, which would mean a partitioning of Iraq.
"The Kurds of Iraq can decide for themselves the name and type of the entity they are living in," Huseyin
Celik, a spokesman for the Justice and Development Party, told the Kurdish online news outlet Rudaw last
week. The Kurds have been effectively autonomous since 1991, when the U.S. established a no-fly zone over
northern Iraq. Turkey, a strong U.S. ally, has long opposed the creation of an independent Kurdistan so that its
own eastern region would not be swallowed into it. But Celik's statement indicates that the country may be
starting to view an autonomous Kurdistan as a viable option--a sort of bulwark against spreading extremism
within a deeply unstable country.

To add even more support that API reported a big drop in 5.7 million barrel drop in crude supply. We did see a
build of 255,000 in Cushing Oklahoma though. The API also said gasoline stocks declined by 48,000 barrels
and supplies of distillates rose by 531,000 barrels.

Russia has cut supply of natural gas to Ukraine but according to the Financial Times the presidents of Russia
and Ukraine have discussed the possibility of a ceasefire in the insurgency-torn eastern regions of Ukraine. Of
course a cease fire does not mean the natural gas will begin to flow but it may be a sign of progress though we
have to remain skeptical. Yesterday oil jumped after reports natural gas pipeline explosion that was carrying
Russian natural gas across Ukraine to Europe. The Ukraine government said it suspected it may have been a
"terrorist act".

Steamy temperatures should give natural gas (NYMEX:NGN14) a lift. NatGasWeather.com Daily Weather
Forecast says that "Very warm to hot conditions are expected again today over the central and eastern US as
highs warm into the 90s over many high populations cities such as Washington D.C. and Philadelphia. A
weather system will track out of the northern Rockies over the coming days with much colder than normal
temperatures. It will eventually attempt to push into the Great Lakes and Northeast this weekend. However,
high pressure should hold strong and prevent it from pushing very far into the US while also weakening it.

The southern U.S. will continue to warm into 90s and low 100s for quite some time as high pressure
dominates. The western U.S. remains much cooler than normal due to a Pacific weather system moving
through, but will gradually warm as the week progresses Weather systems will track across the US during the
last week of June with areas of showers and thunderstorms. This will lead to temperatures remaining in the 70s
and 80s across much of the northern US. High pressure extending over all of the southern U.S. will continue to
bring very warm conditions (90-105⁰F) and moderate to strong cooling demand. There is an increasing threat
of hotter temperatures during the first week of July and could impact many high populations areas of the
southern and eastern U.S. Trend: WARMER (especially after June 28th).

The Fed may also move us today. A pop in inflation in the CPI and record beef, egg, poultry prices against an
anemic recovery is going to present challenges for the Fed. Not to mention the spike in oil. Gold
(COMEX:GCN14) prices holding steady but platinum and palladium rebounding after the recent strike
settlement correction.

About the Author
Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665
or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.