Dr Shane Oliver
Head of Investment Strategy and Chief Economist

oil-field-iraq

The risk of a long, drawn-out conflict is again unfolding in the Middle East. Thousands of militants from the Islamist ISIS group are currently raging across Iraq, increasingly engaged in fighting with the Iraqi Army and other militia groups. Since the crisis escalated, Brent crude oil and gold prices have made gains of around 3-4%.

There are two main concerns flowing from the conflict:

  1. The loss of Iraqi oil exports which amounts to around 2.3 million barrels a day (compared to global production of about 91.7 mbd) and;
  2. The threat of wider (Sunni v Shia) Middle East conflict which may once again involve the US and its allies and run the risk of conflict beyond Iraq threatening oil supplies.

Global oil prices have been somewhat contained even though economic activity has been gradually picking up – which usually means increased demand – partly as a result of the US shale oil revolution. The US shale energy boom, along with war fatigue and budget pressures, partly helps explain why the US is reluctant to get back into Iraq and Middle East more broadly.

My view is that while the Iraq situation certainly presents some short-term risks to commodity prices and to equities, any reaction is likely to be limited and short-lived.

Since the early 1970s it’s clear that it’s not the level of the oil price that poses a risk to global growth but its rate of change. Severe hits to growth have required a doubling in the oil price in the space of 12 months. And right now we are a long way from that.

About the Author

Dr Shane Oliver is the Head of the Investment Strategy and Economics Team. Shane is responsible for AMP Capital’s diversified investment funds and is also responsible for providing economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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