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  • June 20th, 2014

Will ISIS push oil prices to critical point?

Escalating violence in the Middle East could impact global economic activity as oil prices continues to climb.

In the past week, the Islamic State of Iraq and al Sham has taken several northern Iraqi cities by force and despite the fact the majority of Iraqi oil fields are located in the south of the country, this violence has already made investors nervous. 

Capital Economics chief emerging markets economist Neil Shearing says: “The unfolding crisis in Iraq has cast a shadow over the region, causing equity markets to tumble. As it happens, the largest Middle-east and north African economies have only limited trade and financial ties with Iraq, meaning that, in aggregate at least, the economic spillovers should be fairly small. 

“But some countries, such as Jordan, do have relatively large trade ties with Iraq while in others, such as Lebanon, the crisis could exacerbate existing sectarian divisions.”

Outside of the region, the price of oil is being negatively impacted by this surge in Iraqi violence and could impact global investors. 

The Brent Crude oil benchmark currently pegs the price of oil per barrel as $115.06, very close to the “critical” $120 per barrel level according to Old Mutual Global Investors fund manager Richard Buxton.

Buxton, who manages the £1.4bn Old Mutual UK Alpha fund, says: “Ongoing conflicts in the middle east are absolutely at the top of the worry list. We have been concerned all year about this but this is clearly spilling out in a much more dramatic fashion.

“Oil is currently hovering below that critical $120 per barrel level which we have seen several times in recent years. If it goes over this it slows in terms of economic activity. We have to keep a very close eye on this and it would have a very material impact.”

BlackRock global chief investment strategist Russ Koesterich argues a prolonged price rise in oil would pile additional pressure onto the global economy as it suppresses stocks and raises volatility.

As a result, Koesterich says: “Higher oil prices, coupled with still reasonable valuations in the sector, support a continued overweight to energy stocks. 

“At the same time, higher oil and gas prices represent yet another headwind for a consumer already struggling with slow wage growth and high personal debt. In a world of modest growth and a strapped consumer, we believe a cautious view toward consumer discretionary companies is warranted.”

With debate now raging as to the possibility of western intervention into Iraq, Ashmore head of research Jan Dehn sees a resolution to this crisis via this route as unlikely due to past geopolitical crises.

Dehn says: “The west’s loss of moral authority to act has already inflicted diplomatic defeats on western powers in the Syrian conflict and over Crimea and in Georgia.

“We see very little chance that the west will be able to significantly ramp up its influence in the region from current levels, which means that the west’s most important allies increasingly have to rely on their own financial and military means to see off the threat to their rule from militants.”

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