Market Commentary: Conflict in northern Iraq fuels oil concerns

Asian markets struggled early on Monday on fears that extended fighting in Iraq may spread thus disrupting oil exports. Sunni insurgents have seized a mainly ethnic Turkmen city of Tal Afar in northwestern Iraq on Sunday; Tal Afar was one of the last regions in northwestern Iraq still under central Iraqi control.

Meanwhile, Iraqi Kurdish forces control the entrance to the oil producing region of Kirkuk. Kurdish forces control the autonomous Kurdish region. Kurdish forces have used the fighting as a lever to justify assuming control of the oil rich region.

Brent for August settlement increased to $113.28 a barrel in European Exchanges this morning. This rebound in volatility follows one of the most stable periods on record. Volatility is an indicator of uncertainty in markets.

As fighting is currently restricted to the northern part of Iraq the immediate impact of the crisis in limited; 60% of Iraq’s oil production are in the Sunni-controlled south. This increase in concern about Iraqi supply comes as fighting in Libya has curbed production in that country.

European stocks have continued their decline as investors continue to weigh the possibility of higher oil prices impacting the fragile Eurozone economy and whether this new variable will derail the ECB’s exchange rate plans.

At the time of writing the Euro is priced at $1.3543. $1.35 is seen as the critical price for the success of the ECB’s policy actions. If the Euro fails to breach the $1.35 boundary for an extended period a rebound becomes more likely. The ECB took unprecedented steps this month of cutting a benchmark rate below zero.

Bears say that the rate cuts will depreciated the Euro as investors will find it easy to borrow and more ‘expensive’ to remain invested in the Euro. Bulls, on the other hand, send the rate cut attracting investors in European assets thus driving the Euro higher.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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