Thanks to events in Iraq last week, global financial markets are now facing increased volatility, while economies from Japan through Europe to the USA and Australia face a rising threat from inflation generated by higher energy prices and a negative impact on the already weak levels of demand.
That in turn could add to those fears in Europe, Japan and China about deflation, but also hit weaker economies hard, cutting growth, sending interest rates higher, or triggering a burst of stagflation.
So from now on the march of the Sunni extremists through central Iraq towards Baghdad and any fightback from Shia forces and the national army (if it’s still viable) will be the major influence on oil prices.
Watch for any outbreak of fighting and tensions rising in southern Iraq where most of the country’s oil reserves, fields and export facilities are based.
And that in turn will push up fear and loathing in the markets, meaning higher volatility.
On top of that tensions again seem to be rising in Ukraine, and Nigeria, another big producer, is also under pressure from terrorism, and Libya is still split, with the future certainty of continuing oil production and exports unknown and worrying markets.
All in all that’s a recipe for more price rises for oil and gas across the world, and that is already spreading to other commodities (gold rose as well last week, ending a couple of weeks where prices slid).
In fact commodities rose to a nine-month high last week off the back of the sudden worsening of the situation in Iraq.
The Standard & Poor’s GSCI Spot Index of 24 commodities rose 2.1% last week and finished at 660.46, after reaching 664.81, the highest since late last August.
That boosted the index’s 2014 gains to 4.5%.
The events in Iraq helped give oil futures their biggest weekly gain of the year.
In New York, Nymex futures rose 4.1% last week to end close to $US107 a barrel. That was the biggest gain since early last December.
July Brent crude futures in London hit a nine-month high of $US114.69 a barrel on Friday night, and ended 4.4% higher over the week, the biggest rise since last July.
Gold futures settled only slightly higher for the session on Friday but rose nearly 2% for the week as the surge from the growing turmoil in Iraq helped lift prices to their highest close in three weeks.
Comex gold futures for August delivery rose 10c to settle at $US1,274.10 an ounce in New York
For the week, prices climbed 1.7%.
Comex July silver added 12c on Friday in New York, or 0.6%, to end at $US19.655 an ounce. It jumped nearly 3.5% over the week.
And Comex copper futures for July delivery rose a cent to $US3.03 a pound, with prices down about 0.7% over the week.
Bloomberg pointed out that the prices of some other commodities are at high levels.
For example cattle futures on the Chicago Mercantile Exchange jumped to a record $US1.473 a pound last week, while hog (pig) prices rose to three month highs last week because of the lingering impact of a virus that has sliced through the size of America’s pig herds.
The price of Arabica coffee futures in New York continues to recover from a mini-slide a month or two ago. They ended higher Friday for the 4th day in a row.
Bloomberg said cocoa prices have now climbed to their highest since September 2011, and raw sugar futures prices in New York had their third straight weekly gain last week.
This year, coffee futures prices are up nearly 60%, nickel prices (on the London metal Exchange) are up 30% and hog prices in Chicago are up more than 50%.
But the prices of key grains such as corn, wheat and soybeans have all fallen this year and look like falling further with global production forecasts for the rest of the year still solid, especially for the key US corn crop.
Rising grain prices were a big cause of food price inflation and worries in 2007-08 before the GFC hit.
So what does the Iraq problems mean for global oil supplies? Not much at the moment, according to Organization of the Petroleum Exporting Countries (OPEC) and other major industry groups. And investors should keep that in mind.
For example the Paris-based International Energy Agency (IEA) on Friday played down anxieties of a loss of oil exports from Iraq, saying in its monthly report that supplies did not appear to be at risk.
“Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk,” the IEA said.
The Agency estimates Iraqi exports totalled 2.5 million barrels a day in April, and most of Iraq’s oil production and export facilities, as well as reserves, are in the largely Shia areas in the south, where the Islamist rebels enjoy little support.
The country’s oil minister Abdul Kareem Luaibi said on Wednesday these facilities were “very, very safe”.
Iraq is the second-largest oil producer in OPEC. According to figures from the IEA, Iraq accounts for roughly 4% of global oil production.
The IEA comments came after OPEC said on Thursday that extra production should be more than sufficient to meet growing demand if Iraqi supplies are curtailed.
US production of hydrocarbons (oil, gas, and liquids and condensates) continues to hit new highs – it’s now more than 11 million barrels a day (as of April), which will insulate the US from supply shortfalls, but not from the impact of a rise in global prices.
