The situation in Iraq is slowly getting worse with ISIS capturing three more towns and two border crossings this weekend and moved Iraq closer to a collapse.
ISIS captured the Iraqi towns of Qaim, Rawah, Anah and Rutba on Friday and Saturday. Sunni militants captured a border crossing along the frontier with Jordan and the al-Walid Syrian border crossing. The fall of the Turaibil border crossing with Jordan brought the battle closer to involving Jordan as many analysts have predicted over the last two weeks. Jordan is a key ally of the USA and any ISIS progression into Jordan would likely bring the U.S. into the battle.
If ISIS can control the Syrian border it will make it easier for them to shuttle men, equipment and supplies across the border in both directions. ISIS is still heavily involved in the Syrian civil war against Assad so they have to fight on multiple fronts.
ISIS has looted billions of dollars of equipment and supplies from Iraqi warehouses. In Mosul alone they captured 72 tanks left by the U.S., more than 100 Humvee's and two helicopters plus tons of ammunition, rockets and weapons. This military equipment has helped them in their push southward into central Iraq and some of it was taken across the border into Syria to aid their forces there.
The victories by ISIS have become a magnet for young would-be jihadists from all over the world. Multiple Americans have been reported headed to Iraq to join up. Minnesota Public Radio reported that 15 Somali-American men have left their homes in Minnesota in recent weeks to travel to the Middle East and join up with ISIS. One posted of Facebook "Allah loves those who fight for his cause." The first Muslim American suicide bomber blew himself up a couple weeks ago. Several Americans have been detained on their way to join up.
This is happening all over the world. Young impressionable men see fighting with ISIS as a fantasy or a dream come true. Once there they will be taught the art of war by very capable trainers. ISIS has an aggressive take no prisoners training program and anyone completing it will be a killer.
Strategists warn that once they are trained they will probably tire of the sand, heat and carnage of war and eventually leave the battle. However, when they return home, wherever it may be, they will have the skills learned in terrorist camp and capable of carrying out attacks all around the world. Even worse they will have the skills to train others and the badge of honor of having fought with ISIS to lend credence to their teachings.
Make no mistake, there are troubling times ahead. The ISIS leader has vowed to attack New York and unless the ISIS horde is wiped out in Iraq and Syria that vow will probably come true. In a report published in 2013 to attract donations ISIS bragged it had carried out more than 1,000 assassinations and 4,000 bombings in Iraq last year alone. ISIS is thought to have a $2 billion war chest financed by Saudi Arabia and Gulf sheikhdoms.
Iran's supreme leader, Ayatollah Ali Khamenei, said he was opposed to any U.S. intervention in the Iraqi crisis. He accused Washington of fomenting the unrest. His comments put an end to speculation the U.S. might partner with Iran in pushing ISIS out of Iraq. From the U.S. point of view that would be a deal with the devil and since Iran calls the U.S. the great Satan they would apparently feel the same way.
Many analysts now believe Iraq is on the verge of collapse. The Kurds in the northern part of the country have used the ISIS invasion to expand their territory to include the oil rich area around Kirkuk. Over the last couple weeks they have managed to sell two tankers of oil produced in Kurdistan and piped through Turkey to the Mediterranean. Getting millions of dollars for the oil brings them closer to declaring independence from Iraq. According to Kurd officials there are two more tankers loading oil this week.
Iraq and the Kurds have had a very long history of disagreements. Saddam Hussein used chemical weapons on the Kurds and killed nearly 5,000. Iraq no longer has the power to enforce its laws in the Kurdish region. The Kurdish peshmerga militia has more than 100,000 well trained soldiers and they are not afraid to fight. When ISIS headed in their direction and started to move towards Kirkuk and the Iraqi military was fleeing the Kurdish militia quickly took over eastern Kirkuk and prevented ISIS from taking that region. Except for Sunni neighborhoods of western Kirkuk the city is under the control of the Kurdish peshmerga militiamen.
It may be impossible for Iraq to regain control of the Kurdish portion of Iraq. Unless the situation on the ground changes dramatically ISIS will gain control of a major portion of Iraq. If they halt their advances now and consolidate their positions it will be very hard for the Iraqi military to push them out even though they outnumber then 25:1. The wildcard is airpower. ISIS has no air force and they will be easy targets whenever they congregate on the ground. However, their 7,500 fighters in Iraq are being joined by thousands of Sunnis that live in the affected region. If ISIS switches to guerilla warfare tactics they could remain an effective force for years and slowly wear down the Iraqi military because the Iraqi soldiers have no will to fight.
ISIS is using the 1,300 year old conflict between Sunni and Shia as a basis for forming a caliphate, or religious state, from parts of Syria and Iraq. Since the Sunni-Shia battle is not likely to end in our lifetimes ISIS has a good chance of making that caliphate come true as long as the U.S. or Iran don't join the Shiite government in Iraq in the war against ISIS. As long as the major powers stay out of the conflict the breakup of Iraq is nearly guaranteed.
The fighting in Iraq centered around a major oil refinery for most of the week. On Saturday ISIS claimed they had finally captured the refinery at Baiji, 43 kilometers north of Tikrit. The Iraqi military disputed the claim but the black ISIS flag is flying over the refinery.
Iraqi state TV reported the army had repelled four attacks last week but ISIS militants continued to press their gains. The 300,000 bpd refinery produces gasoline and diesel for use in Iraq so the capture has no impact on global oil supplies. It would help the ISIS attack since it would prevent the Iraqi military from refueling once existing supplies are exhausted.
Iraq continues to export about 3.3 mbpd and as long as that oil continues to flow the price of crude should remain in the $107 range. If ISIS is successful in moving south into the oil fields, which is highly doubtful, we could see prices rise to $120 or more. The southern Shiite part of Iraq is heavily defended and unlike the sympathetic Sunni occupied north. ISIS would be confronted by much larger forces and expose themselves to Iraqi airpower as it moved across the flat desert towards the south.
In the U.S. crude inventories declined -600,000 barrels to 386.3 million. Inventories at Cushing rose by +200,000 to 21.4 million for the first gain in several months. With inventory levels nearing the operational threshold of 20 million, I am sure they are taking steps to reduce the outflow of oil until inventories begin to rebuild.
Crude imports were 7.23 mbpd and right in line with the prior two weeks and the lowest level since 1991. U.S. production of 8.43 mbpd was slightly below the 25 year record of 8.47 mbpd set three weeks ago.
Gasoline inventories rose slightly for the third week with an 800,000 barrel gain to a two month high. Gasoline demand at 9.26 mbpd was very close to the high for the year of 9.31 mbpd set four weeks ago.
Distillate inventories rose +400,000 barrels also to a two-month high. Distillate demand declined for the third week to 3.81 mbpd.
Strangely, as we enter the high demand summer driving season with the 4th of July weekend only a week away the refinery utilization declined to 87.1% and a two month low. That makes no sense given the minor gains in inventory levels this week.
In the graphic below green represents a recent high and yellow a recent low.
Natural gas in storage increased by +113 Bcf to 1,719 Bcf for the week ended 6/13. This was slightly more than the +109 Bcf consensus estimate. Inventories are still -706 Bcf (-29.1%) below year ago levels and -851 Bcf (-33%) below the five-year average of 3,570 Bcf. Injections will have to accelerate significantly to make up this 800 Bcf deficit before November 1st. As warmer weather arrives that will be difficult because more gas will be consumed to generate electricity. You can expect to pay more to heat your house next winter.
The market broke out to new highs again on the quadruple witching Friday, which is normally bullish. However, the week after expiration in June has been down 21 of the last 24 years. I would be prepared for some volatility this week.
The market is rapidly moving into overbought territory especially in the energy sector. If something changes in Iraq to negatively impact the price of oil we can expect an immediate drop in energy equities.
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