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It has to be noted that no crude supplies were disrupted during the three-week Israel-Hamas conflict in 2008. While regional governments strongly criticized Israel, the fighting did not spread. Similarly, during the 2..

17 Nov 2012

Commodity Online
This time around, a knee jerk reaction on Wednesday to the news of the Israeli strike on Gaza, saw the front-month Brent contract edge higher by $2/bbl to touch $110/bbl. Although actual oil supplies were not affected during the attack, the move upward provided a litmus test for how the oil market factors in geopolitical risks in the region, especially given the current state of market fundamentals, said Barclays in a snippet.

It has to be noted that no crude supplies were disrupted during the three-week Israel-Hamas conflict in 2008. While regional governments strongly criticized Israel, the fighting did not spread. Similarly, during the 2006 Israel-Hezbollah war, crude supplies were not affected and regional powers remained on the sidelines.

Although oil market demand – supply fundamentals are fairly balanced at the moment, this is largely because key OPEC suppliers continue to produce at elevated levels, helping to fill the void left from supply shortfalls elsewhere in the non-OPEC (Sudan, Syria, Yemen, North Sea, Brazil). Even among OPEC producers, reduced Iranian exports and variability in Nigerian output have created a void, stressing other producers to supply more to balance the market.

In an environment where spare capacity is limited and key suppliers are stretching themselves to fill the plurality of shortfalls, geopolitically driven upside risks to oil prices are increasingly outweighing the downside risks, in Barclays' view.

Iran issue

Going into 2013, Barclays sees serious political risks on the horizon, foremost the standoff over the Iranian nuclear program. This week, the International Atomic Energy Agency released its quarterly report on Iran.

The UN inspectors found that Iran has augmented its stockpile of higher grade 20% enriched uranium by nearly 50% in the past three months and sharply increased the number of centrifuges placed in the heavily fortified Fordow enrichment site.

As Barclays noted before, next year may produce an important inflection point for Western nations if the diplomatic track remains stalled. They may face the difficult choice of either allowing Iran to approach the brink of nuclear breakout capability or taking other action to forestall that possibility. But for these risks to be transformed into catalysts that result in a breakout to the upside for prices, the markets could increasingly demand much more than inflammatory rhetoric or stalled nuclear diplomacy.

"Until such catalysts materialize through the growing cloud of risks we mention above, oil prices could continue to oscillate around the current year-to-date mean." the Bank said. 

Meanwhile, the relationship between Iran and Hamas has recently cooled to some extent because of the civil war in Syria. Iran and Hezbollah are strongly supporting the largely Alawite Assad regime in Damascus, while Hamas has publicly sided with the mainly Sunni Syrian opposition. At the same time, its ties to key Sunni states have strengthened.

The militant group’s exiled leader, Kahled Meshal, abandoned his longstanding base in Damascus in February 2011 and relocated to Qatar. Last month, the Emir of Qatar became the first head of state to visit Gaza since Hamas won the 2007 elections and pledged $400mn in infrastructure support.

The Muslim Brotherhood government in Egypt has been particularly vocal in its support for Hamas since the latest round of fighting commenced. The Egyptian Prime Minister visited Gaza on Friday and President Morsi has vowed that Cairo will not leave “Gaza on its own.”

Nonetheless, it still not obvious whether the Egyptian government will do anything to seriously jeopardize the 1979 peace agreement with Israel, Barclays said.


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