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Iraq, Ukraine situations affecting oil markets now, but may not in the long run

Worries about the conflict in Iraq as well as concerns about a possible Russian attempt to infiltrate eastern Ukraine’s border have caused oil prices to decrease this week to the lowest they have been in nine months. The main culprit seems to center on lower global oil demand, which the International Energy Agency (IEA) 2014 Oil Market Report (OMR) decreased to “1.0 million barrels per day (mb/d).” Their assessment was based on “lower‐than‐expected deliveries in the second quarter” as well as the International Monetary Fund's feeble economic growth outlook. However, will these conflicts continue to affect oil markets in the near future?

In the short run, the answer seems to be yes, but in the long run, it’s most likely a no. According to a CNN report, the current instability in Iraq as a result of ISIS has caused companies such as London headquartered oil exploration company, Afren Plc (LON: AFR), Abu Dhabi’s TAQA (UH:TAQA) have suspended operations. Furthermore, oil majors Chevron (NYSE:CVX), Exxon (NYSE:XOM), and BP (NYSE: BP) have also decided to evacuate ‘nonessential workers’ from Iraqi operations near the Kurdish region. In addition, Russia’s recent actions have also concerned oil investors, because it sent around 300 trucks filled with what it says is ‘humanitarian aid’ to eastern Ukraine and has assembled 45,000 troops on the country’s border. As a result NATO warned such actions was construed as having a “high probability” of Russian military intervention in Ukraine’s civil war.

However, regardless of these conflicts, the IEA report describes that as the global economy “improves in 2015, demand is set to accelerate by 1.3 mb/d in 2015.” In an interview with Bloomberg, Steven Wieting, Citi Private Bank’s Global Chief Strategist, stated that the Iraq and Ukraine situations “are risks, but they are not anything that changes the central case for the global economy.”

The IEA also detailed that "Oil prices seem almost eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world." This is because of an increase in stock from Saudi Arabia and Libya as well as a boost from U.S. production which has filled in the gap of oil supply left by Iraq and Russia.

Based on information released by the U.S. Energy Information Administration (EIA), production reached “an estimated 8.5 million barrels per day (bbl/d) in July,” which was “the highest monthly level of production since April 1987.” Based on information released by the U.S. Energy Information Administration (EIA), production reached "an estimated 8.5 million barrels per day (bbl/d) in July," which was “the highest monthly level of production since April 1987." The report also revealed that "U.S. total crude oil production, which averaged 7.5 million bbl/d in 2013," and is predicted "to average 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015." As a result of this abundance in supply, any type of massive interruption to oil markets will not likely take place even if the conflict in Iraq and tensions between Ukraine and Russia get worse.