Oil prices are expected to make a jump as Turkey is considering invading Northern Iraq.
Photo: AP
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Mix Some Oil and Troops
Oil prices continued a record-breaking streak last week. Brent crude added 2.6 percent at the NYMEX on October 17 to climb to $88 a barrel. A new hike in prices is linked with an increasing possibility of a new war in the Middle East on the Turkish-Iraqi border. There are also economic reasons as OPEC nations increased production by as little as 1.8 percent while demand on fuel is still growing faster. The $100/barrel threshold is becoming a reality, much to Russian investors’ satisfaction, and growth potential of Russian oil and gas stocks is significantly increasing.
Western Example
Political instability in the Middle East has become such a common thing that a ware alone is no longer a valid reason for a rise in oil prices. Crude prices last jumped in summer 2006 when Israel invaded Lebanon. This time, the prices are growing as Turkey is considering bombing Northern Iraq. This all happens at the background of the persistent guerrilla war against American contingent in Iraq.
Turkish lawmakers voted 507-19 on October 17 to give the government the green light for a cross-border operation in Northern Iraq for one year. Turkey’s Prime Minister Recep Tayyip Erdogan reacted to the news saying that “the operation will be held in the right time and only when there is the need for it”. Translating it from the army’s parlance, it means they have started the countdown, and there is as much time left before the start of the war as is necessary to deploy troops.
However, the conflict in northern Turkey and Iraq was not made up for vital interests of remote third countries. As World War II ended Kurdistan did not get independence from British colonial authorities but was divided to become a part of Iraq, Iran and Turkey.
Kurdistan has become for Turkey something that Chechnya was for Russia in the 1990s. On the one hand, Kurdistan enjoys broad autonomy and state investments. The 19 deputies which voted against the war in the Turkish parliament represent the pro-Kurdish Democratic Society Party. On the other end, there is persistent separatism and terrorist attacks. The occupation of Iraq by U.S. troops made the northern Iraq-Turkey border transparent helping numerous advocates of Kurdistan’s independence to come to Turkey. It sparked a surge in violence which forced Turkish authorities to consider a coercive scenario.
The United States and Great Britain, which in fact stirred the unrest, now act as peace-makers. “We don’t think it’s in their interest to send more troops in Iraq,” U.S. President George Bush said referring to the Turkish parliament’s decision.
However, President Bush’s peace-making halo turns pale if we consider that Kurds in Iraq are the only force which benefited from the U.S. invasion – Saddam Hussein was eliminating Kurdish villages with chemical weapons to crack down on separatism – and the only one loyal to the United States. In any case, Turkey is in no hurry to listen to advice of its senior partner from the NATO. It appears that Turkey values its territorial integrity more than a dim prospect of become an EU some day.
Eastern Craftiness
Skyrocketing oil prices caused a reaction at OPEC, its major supplier. OPEC chief Abdalla El-Hadri said: “OPEC is doing all it can and is carefully watching developments in the oil market and had observed with concern the recent escalation in oil prices. The market is very well supplied. The rising prices which we are currently witnessing are, however, largely being driven by market speculators.”
OPEC seems to do everything to fight speculators. The last session of the cartel voted on September 11to increase quotas on oil production by 500,000 barrels a day. The decision was taken unanimously at the backdrop of the uninterrupted but gradual price growth as crude added 27 percent over in just 8 months.
However, production was raised by as little as 1.8 percent from 26.1 to 27.2 barrels a day. OPEC delegates surely saw a report issued by the International Energy Agency (IEA) on September 4 which said that demand on oil would grow 3 to 6 percent in the fourth quarter of 2007.
IEA experts add that the global financial crisis has not affected American economy as much as was believed while emerging economies such as China did not suffer at all. Later developments have supported the IEA’s forecast fully. Demand on oil in China is now forecast to grow 7 percent in the fourth quarter while the U.S. economy has swiftly picked up after the crisis. The demand goes up 7 percent while the supply rises 1.8 percent, meaning that prices are going to grow. In this case OPEC’s statement of sufficient supply sounds explicitly cynical.
However, OPEC is right in some sense. There are indeed a lot of speculators on the oil market. The volume of oil futures bought by hedge funds in the past month exceeded 69 million barrels. At the same time, the overall demand on oil averages 83 million barrels a day. As the dollar is getting weaker, oil has suddenly emerged as a protection asset, and most investors expect oil quotations to continue their growth.
Speculation sentiment of hedge funds is supported by latest prospecting data. It is already impossible to find surface oil seepages anywhere in the world. Oil is now extracted from deep levels while costs of the works are growing. The time of cheap oil has apparently gone for good.
Russian Geschaeft
The combination of fundamental and speculative factors has given a dramatic effect. Brent rose 2.6 percent on October 17 to exceed $88 a barrel. Sweet crude went up 2.92 percent to $86 a barrel while Russian REBCO lifted 2.8 percent to almost $79.
Given growing prices and demand Russian oil and gas assets look under-valued. Experts estimate that that the stocks have regained as little as 25 percent of the funds that nonresidents withdrew from the market in the liquidity crunch in August and September.
Foreign investors, however, are in no hurry to go back. Many investment firms are now busy drafting annual reports, and the reports are not brilliant after the crisis. So, the Russian stock market should not expect a drastic upward movement in the oil and gas sector in the nearest future.
But if the auspicious situation persists, the growth is sure to come as in this case all liquidity will go back to the market and major Western players may broaden limits on Russian stocks.
Russian oil and gas assets are not the only ones with a growth potential. The Russian government takes the largest part of export profits from oil and gas firms. What is more, import duties are to be further raised on November 1. Russian banks, in contrast, will feel the improvement on the oil and gas market at its full as they service the growing money flow.
Pavel Chuvilyaev
All the Article in Russian as of Oct. 22, 2007
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