Dated Brent surged to a six-month high of $112.845/b Friday, driven by its futures component in response to the worsening security situation in one of the world's leading oil producers, Iraq.
The physical North Sea crude benchmark was last higher on December 4 at $113.37/b, according to Platts data.
The swift takeover of several cities in northern Iraq by rebel group the Islamic State of Iraq and the Levant (ISIS or ISIL) has jolted futures markets, pricing in the risk of outages should the group make further gains or security deteriorate further.
However, so far the physical crude market has not been affected by the situation, with Iraqi production, the bulk of which comes from the south of the country, continuing as normal.
"In our view, the two most likely scenarios are a stalemate or a limited retrenchment of ISIS as the Iraqi army fights back," Bank of America Merrill Lynch analysts said in a research note Monday. "In both instances, we see Brent in a $105-$115/bbl range. In the unlikely scenario where ISIS temporarily enters Baghdad, Brent could head $10-15/bbl higher. In the highly unlikely scenario where 2.6 mn b/d of Iraqi exports are disrupted, the impact would be quite severe, with Brent rising as much as $40-50/bbl. A swift peaceful resolution would likely take Brent $5 to $10/bbl lower. But as Syria and Libya have shown, limited US military involvement can be a recipe for instability."
The physical North Sea market itself has been strengthening for other reasons over the last two weeks: two VLCCs have been fixed to carry Forties crude East, loading from Monday onwards when the Hound Point VLCC terminal opens. However, sweet crudes remain under pressure, with Statoil offering a Gullfaks cargo at Dated Brent plus $2.20/b, the grade's lowest differential since February 2011.
Structurally, the Dated Brent minus 2nd-month Cash BFOE spread was assessed down $0.33/b at $0.065/b Friday.
