SUPPLY RISKS REMAIN HIGH IN SHADOW OF CRISES

Conflict-weary oil traders have been here before. As the world holds Russia responsible for the blatant rocket attack on a Malaysian airliner, raising the spectre of a showdown with one of the world’s largest oil producers, crude prices moved up just a couple of dollars on Thursday. On Friday, Brent crude fell US49¢ to US$107.40 a barrel, after hitting a session high of US$108.62. No stranger to geopolitical volatility, oil traders have already seen this year Russia annex the Ukrainian region of Crimea and Libyan output shrink to insignificance. Markets initially reacted sharply to news of militant groups taking over large parts of Iraq to reach US$115 per barrel, before pulling back equally strongly as the oil-rich southern region of the country did not appear to be under imminent threat. The needle has barely moved on the latest episode of the longrunning Israel-Palestine conflict. Still, there is a sense that markets are too sanguine about recent geopolitical events, and some analysts are taking note. Bank of America Merrill Lynch has identified oil price spike among its four major risks for this year and the next. The Institute of International Finance, an association of the global financial services industry, warned in its annual report this month that an escalation of tensions in Iraq and political events in Libya, Ukraine and Venezuela could push oil prices higher. While it’s too early to determine how the latest Russia crisis will play out, “if the Western response is to further tighten sanctions on Russia, commodity supplies may be negatively affected, potentially leading to markedly higher prices,” said Tom Pugh, commodities economist at Capital Economics. Optimism over rising supplies from Libya and spare capacity in OPEC countries, however, have tempered oil traders’ reaction to geopolitical events. Oil deliveries in Europe and developed Asia fell somewhat faster than expected year-onyear in April and May, according to the International Energy Agency, and global economic watchdog International Monetary Fund has hinted it may trim its forecast for global economic growth. “While the market may thus be going through something of a soft patch, prices remain historically high and there is no sign of a turning of the tide just yet,” said the IEA in its July report. “The global economy is still expected to gain momentum in 2015. Supply risks in the Middle East and North Africa, not least in Iraq and Libya, remain extraordinarily high.”