We were surprised that WTI closed up today, +$0.12 to $51.99. WTI is up ~$2.50 in the past week primarily driven by the escalation of the Kurdistan/Iraq/Turkey issue in the last week as Iraqi troops took back Kirkuk region oil fields from Kurdish control, and the fear that the fighting could escalate resulting in some disruptions on Kurdistan oil production. Kurdistan President Barzani’s statement (posted on Rudaw news ~10am mountain LINK) is a must read and we thought it would have led to some of this Kurdistan premium being given back today. Barzani’s statement should reassure markets that the risk of civil war is effectively zero and, more importantly, it sounds like Kurdistan realizes that the time to press for full independence is not now, but sometime in the future. Barzani is clearly signaling the Kurds have to fix their internal issues and have unity on the Kurdish side before they can move on the independence mandate/goal. Plus the fact that there is an agreement between Kurdistan and Iraq to move back to previously agreed to lines should provide comfort that Iraq will sign off on Kurdistan oil exports as requested by Turkey. These two events should reduce the Kurdistan geopolitical risk premium in oil.
The feared Kurdistan/Iraq battle for Kirkuk and its oil fields didn’t happen. Last Wed/Thurs, reports started that Iraqi troops were moving to the outskirts of Kirkuk and that the Kurds were moving ~6,000 troops to defend Kirkuk. On Friday, Iraq gave the Kurds a Sunday deadline to withdraw from Kirkuk, and that deadline was subsequently extended to Monday. The concern at that time was that both sides had brought battle experienced troops in a face off at Kirkuk. These are not reserves, these are troops that have been fighting hard against a common enemy ISIS. On Sun/Mon, there were reports of some shooting and casualties, but no major extended fighting. And Iraq had taken control of Kirkuk and surrounding oil fields. And then by this morning, Iraq had pushed farther north to take control of other areas. The key to the reports on Mon/Tues is that there were no reports of any major battles or fighting escalation. Rather, Kurdish troops were withdrawing and leaving the Kirkuk region including the oil fields to Iraq control.
This morning’s Rudaw story “President Barzani to publish statement post-Kirkuk crisis, avoid ‘civil war’” was overlooked. We consider Rudaw as the best Kurdistan news site for the most frequent updates on Kurdistan. This Rudaw story [LINK] was posted ~445am mountain and didn’t seem to get traction but it contained a few good insights. It alerted to the Barzani statement coming later today, that Barzani was going to avoid a civil war, confirmed the control of lands by Iraq and, significantly, warned that there were internal Kurdish parties issues that need to be resolved first to have a united Kurdistan view. Rudaw wrote that “The Peshmerga General Command, under the control of President Barzani as he is the commander-in-chief of all armed forces, stated on Monday that the fall of Kirkuk came partly as the result of a historic treason committed by some leaders of the Patriotic Union of Kurdistan (PUK), an ally of Barzani’s Kurdistan Democratic Party (KDP)”.
Barzani’s statement is pointing to more than a ceasefire, it looks to indicating Kurdistan’s fight for independence is being delayed until sometime in the future not now. We believe Barzani’s statement is significant and pointing to something more than a ceasefire. Rudaw posted Barzani’s statement around 10am mountain and didn’t seem to get oil market attention for the balance of the day. The morning focus for oil markets was on the Iraq capture of Kirkuk and oil fields territory and then later the news that the Kurds and Iraq had agreed to move back to the borders between Erbil and Baghdad that existed before the Mosul operation started on October 17, 2016. [The dotted line in the below BBC map is what we understand to be this border line.] But the Barzani statement had a number of key insights. Barzani highlighted the internal splits and stressed the need to have unity among Kurds. Barzani highlighted there is an agreement with Iraq on lines of demarcation that includes Iraq having control of the Kirkuk area oil fields. We saw it as an admission they need to get the Kurdish house in order first and foremost. He said he wasn’t prepared to risk more lives now. His closing statement is clear and telling. “The Kurdistan nation with the power of the brave ones, sooner or later, will eventually reach its right and sacred objectives. Today is the day for believing in the power and the unity of our nation.” We see this as him saying they aren’t getting to independence today, rather today’s priority for Kurdistan is internal unity. The full Barzani statement is posted below.
Barzani’s statement: Throughout history, the Kurdistan nation has been under threat and oppression and had its rights violated. In this history, the Kurdistan nation has defended its identity, faced genocide and massacres. The latest was the barbaric attack of ISIS terrorists on Kurdistan and the commitment of genocide against Kurdish Yezidis. Yet the Kurdistan nation has always operated from the perspective of peaceful solutions and we have never wanted to fight. But rather, fighting has been imposed on us and we have made all attempts for peaceful solutions for our existence and reaching our goals. Our main objective has always been the security and rights of the Kurdistan nation. Beloved citizens. What happened in Kirkuk city was the result of unilateral decisions of some persons within a certain internal political party of Kurdistan, which eventually led to the withdrawal of the Peshmerga forces, as was seen. As a result of the withdrawal, the border line between Erbil and Baghdad that existed before the Mosul operation started on October 17, 2016 became the basis of understanding for the mechanism of deploying Iraqi and Kurdistan Region forces. We are assuring the people of Kurdistan that we are doing our utmost to preserve our achievements and the security and comfort of the people. And now, we advocate for the protection of the unity and resilience of the Kurdistan nation and the political parties. I am calling on media outlets to deal with the delicate situation of Kurdistan and Iraq with patriotic and national responsibility. The durable nation of Kurdistan, the loyal people and volunteers, brave Peshmerga, the honorable families of martyrs, the blood your sons gave and continue to give on the freedom path of Kurdistan, the loud voices you raised for the independence of Kurdistan that you sent to all nations and world countries will not be wasted now or ever. The Kurdistan nation with the power of the brave ones, sooner or later, will eventually reach its right and sacred objectives. Today is the day for believing in the power and the unity of our nation.”
Reported Erbil-Baghdad Line For Mosul Oct 2016 Agreement
This doesn’t mean that the Turkey/Iraq fight against Kurdistan independence is over. It should be clear that if Kurdistan wants to actually move ahead on independence that we expect Turkey and Iraq to have the same view on independence – No. But it feels like the basis of a pause/truce is being set in place for sure from the Kurdistan side and likely also from the Iraq side. Both parties have reportedly agreed to move back to a previously agreed control lines as agreed in Oct 2016 and overseen by the US.
The agreement should allow Turkey to get Iraq sign off to allow Kurdistan oil exports. The agreement is interesting as it appears to be putting the Kirkuk area oil wells back under Iraq control and leaves the Kurdistan oil under Kurdistan oil control. It makes us feel like this agreement probably brings it back to what might be a one of the key battles between Iraq and Kurdistan – who gets how much of the Kurdish oil revenues including Kirkuk? Turkey has been saying that they will look to the Iraq central government for approval of oil exports thru Turkey. And any agreement that appears to get Iraq onside has to provide confidence to the market that Iraq will sign off on all of Kurdistan oil exports.
The Barzani statement and agreement should have reduced the Kurdistan geopolitical risk premium in oil. Barzani’s closing statement is saying that Kurdistan has to deal with its internal Kurdish problems and get unity therein before pressing for independence. The Kurdistan and Iraq agreement should provide the basis for Iraq to sign off to Turkey on approving of Kurdistan oil exports. These two events didn’t get the market’s attention today, but should point to a reduction in the Kurdistan geopolitical risk premium in oil.