The price of crude oil shot up on Monday, from a 14-week low, as a direct result of the ensuing military conflict between Russia and Georgia over the disputed territory of South Ossetia. Although Georgia is not a producer of oil, the fighting is disrupting exports from the Caspian region.
Georgia is also a key link in the U.S. backed energy corridor that connects the Caspian Sea with the world markets, bypassing Russia.
Crude oil for September delivery gained as much as $1.70, or 1.5%, rising to $116.90 a barrel on the New York Mercantile Exchange. While in London it was trading at $116.05 by as early as midday.
Oil had fallen more than $5 as recently as Friday, with the market choosing to ignore the outbreak of hostilities between the two nations in the Caucasus region. When it had settled at $115.20 on Friday, it had been the lowest close in London since May 1st.
Prior to the return to today’s rising prices, fears of a slowdown in demand for oil had stripped about $31 off of the price of a barrel, or 21% from its July 11th peak of $147.27.
But, a weekend of bitter conflict heightened concerns that the violence could affect market infrastructure in Georgia, both an important transit point for crude shipments from Central Asia to Europe and the home to a section of the Baku-Tbilisi-Ceyhan pipeline.
The pipeline, the world’s second largest - which BP has a 30% stake in, runs through South Georgia, from Azerbaijan, and into Turkey, with the capability to carry around 1.2million barrels of oil per day.
Despite the timing of the price jump the conflict alone cannot be accused of acting unilaterally in stimulating market activity. Traders who deemed last week’s 7.9% drop in the price of a barrel as excessive and a fire on the Turkish section of another of the region’s pipelines, the BTC, which was only extinguished on Monday following an explosion in the middle of last week, have also contributed.
In this unpredictable period it is unsurprising that projected outlook on the price of crude oil differs between experts.
Gerard Burg, energy and minerals economist at National Australia Bank in Melbourne believes that a prolonged conflict could potentially impact significant oil flows. He told Bloomberg: “Whether we get an actual physical disruption in supply to Europe, that will be the critical thing.”
In contrast a survey of 35 analysts by Bloomberg shows as many as thirteen expect oil to fall this week as demand, particularly in the US, falters as economic growth stalls. Twelve of those polled expect oil to rise while, 10 forecast little change.
In addition to demand concerns, the technical outlook for crude has turned increasingly bearish since prices hit record highs. The liquidation of some large investors has removed significant support for prices while others are looking to increase their bets on further falls by selling short.
Undoubtedly motorists will be hoping that thirteen in the Bloomberg poll are right.
