Asset of the month: Crude numbers

Why oil prices may well be on the rise in March |  The Delta Economics asset price forecasting model is calling oil long this month reversing the extensive fall in oil prices. The Information Ratio, which measures the performance of our index each month against benchmark returns, is at 0.79 for March’s oil call. Any Information Ratio value above 0.5 suggests strong back-tested performance.

There are two reasons for being bullish about oil. First, March of any year usually sees a seasonal pick-up in trade following Chinese New Year. Trade and oil prices are highly correlated (0.94) and move in the same direction: if oil prices rise, then trade usually rises too. This usually reflects an increase in demand for that month (Figure 1).




Figure 1  |  Monthly value of world trade (USDbn) versus WTI Oil, Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg


Second, Saudi Arabia has increased crude oil prices for April’s sales to Asia. This is bound to put upward pressure on prices in March more generally. Not least because it hints that Asia’s economy may well be turning a corner. The correlation between Chinese trade and oil prices is very high at 0.89. Chinese trade similarly dips at the beginning of the year but Delta Economics sees a rapid pick-up during March with overall growth in Chinese trade for 2015 looking positive at over 7%.




Figure 2  |  Monthly Value of Chinese trade (USDbn) versus WTI oil Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg


The pick-up in demand at the end of Q1 is quite marked. The forecast for oil during 2015 is for a rise in oil prices alongside a modest increase in the rate at which world trade is growing – from 1.2% in 2014 to 1.9% in 2015. However, this does not herald a return during the year to values above $100 a barrel. The modest growth in trade we are forecasting for the year is substantially slower than the post-2008 oil price trough and, as this suggests that global demand remains slack, the crude numbers do not suggest rapid increases in oil prices during the year.


Asset of the month: Crude numbers  |  Author  |  Rebecca Harding  |  CEO

Trade Insight February 2015

Currency wars and volatility


Executive summary

  • January 2015 was a volatile month with markets unsettled by the uncertainty generated at the beginning of the month over European Central Bank Quantitative Easing (QE). This uncertainty was compounded by the removal of the Swiss franc’s currency peg to the euro by the Swiss National Bank.
  • Both events have put significant pressure on the euro during the first month of 2015 which Delta Economics expects to continue throughout the year. We are forecasting that the euro and US dollar may well reach parity by the end of the year, if not earlier if current trends continue.
  • Delta Economics is expecting the PMIs published at the beginning of February to be broadly in line with consensus expectations. We expect China’s PMI to fall back while we are expecting PMIs in Europe to improve slightly. It is too soon to herald a recovery but this is a positive start to 2015.
  • The Delta Economics Asset Trade Corridor Index (TCI-A) reflects the underlying volatility in markets with Information Ratios largely negative for equities and currencies. The TCI-A has produced an average monthly paper return of 1.3% over the past 19 months. The average return on an equally weighted portfolio in January 2015 was 2.2%.
  • We expect oil prices and the value of the euro to fall during February. We expect other commodity prices to rise (against consensus), equities to rise and the US dollar to strengthen against most major Emerging Market currencies. However, the tightest strategy that we use suggests a strong downside risk to all these calls because of the underlying volatility reflected in the information ratios.


Greeks bearing gifts? The consequence of January for the euro in 2015


Delta Economics is of the view that the euro will reach parity with the US dollar by 2015 and has the potential to fall lower if current volatility and pressures on the currency continues. This is for several reasons:

First, Delta Economics considers the euro to have been over-valued for some time, largely as a result of the German trade surplus. Although Europe needs German trade to be strong because of the supply chains that originate in Germany and spread out across Europe, the high value of the euro has made it harder for the internal imbalances of the eurozone to be corrected by export-led growth outside of Germany.

At the outset, markets viewed the eurozone with a degree of scepticism. By June 2001 one euro bought 0.85 US dollars. As time has gone by, eurozone performance has, inevitably perhaps, become more dominated by Germany pushing the value of the euro up and kicking the issues of intrinsic imbalances between Member States down the road. However, instead of resolving imbalances by everyone “becoming more like Germany”, a weaker currency simply reflects the fact that everyone isn’t like Germany.

Second, the fact that QE was necessary in the first place made it abundantly clear that the eurozone is far from a marriage of equals. The euro came under pressure ahead of the announcement and fell to new lows subsequently. But it is here where the facts start to conflict with policy expectations. Theoretically, a lower euro should boost the real economy through trade because exports should become cheaper. However, what we’ve actually seen over the years since the introduction of the euro is a high correlation between the euro’s value and the value of trade: in other words, when the euro goes up, so does trade (Figure 1).

We believe there are two explanations for this: in the first instance, European trade, dominated as it is by Germany France, Italy, the Netherlands and Belgium, is largely at the high end of supply and value chains and therefore does not respond particularly to changes in the value of the currency. Even for weaker nations more dependent on commodities, the importance of Europe-wide supply chains means that the relationship still holds. For example, the correlation of the value of the euro with Greek trade is 0.89.

Furthermore, the value of the euro is actually a signal by the markets about the strength of the European economy: when the economy and institutions seem strong, the value is high and vice versa. In other words, as discussed previously, trade is an important driver of the value of the euro because of its importance as a driver of economic performance in the eurozone generally. While trade is falling, and we are forecasting it will fall by 3.7% within the eurozone in 2015, so too can we expect the value of the euro to fall. The result is that policy can have very little effect on the real economy through currency manipulation.




Figure 1  |  Monthly value of eurozone exports, USDbn versus USD per euro spot, Last Price Monthly, June 2001-Dec 2015
Source  |  DeltaMetrics 2015, Bloomberg


The third reason why the value of the euro is likely to come under increased pressure is the outcome of the Greek election in January. Syriza is looking to renegotiate its debt and start the process of loosening the tight controls it has had over spending. It will not be helped by a lower-valued euro (Figure 2) because of its inter-dependency with trade in the eurozone as a whole through its role as a trade hub.




Figure 2  |  Monthly value of Greek total trade (USDm) versus USD per euro spot price, Last Price Monthly, June 2001-Dec 2015
Source  |  DeltaMetrics 2015, Bloomberg


Greece’s trade to GDP ratio is 0.4: in other words, there is a fairly strong pull of trade on Greece’s GDP. Oil is a critical part of this; the correlation between Greece’s trade and the oil price is 0.80 – largely because of the importance of oil in Greece’s total trade structure. Greece’s exports of refined oil, for example, are twice as high as the second-largest export sector – medicines.




Figure 3  |  Greece’s debt and the challenge of trade
Source  |  DeltaMetrics 2015


Greece’s trade is just 0.4% of Europe’s total trade; however, their trade is nevertheless important both because of the impact that it has on the prospective growth of the Greek economy and as a portent for the negotiations about debt restructuring, austerity and structural reform ahead. Put simply, if a low-valued euro is unlikely to help boost Greek (or eurozone for that matter) trade more generally, then there is little that monetary policy at a European level can do to help long-term growth in the peripheral nations. Greece’s debt is, according to Syriza, not repayable and imposes too many restrictions on the Greek economy. One option is to set debt repayments against growth targets but, given falling oil prices and falling intra-European trade, this looks ambitious.

The eurozone needs more than QE and a low value of the currency for growth. The eurozone’s peripheral nations’ struggle for growth is accentuated by the fact that they must trade in euros internally and externally. Given “austerity” constraints attached to their sovereign debt, this makes it very difficult to grow. There will continue to be sustained political dissent between Member States on the best way to resolve the issue of Greece, and there is a danger that the debate will spill over to other nations, like Spain, Ireland and Portugal.

The likely outcome of all of this is continued market pressure on the euro (Figure 4).




Figure 4  |  Monthly value of Eurozone exports versus USD per Euro spot price and linear forecast, Jan 2014-May 2016
Source  |  DeltaMetrics 2015, Bloomberg, Delta Economics analysis


The pressure on the euro over the last year has mostly been downwards. The Delta Economics asset price forecasting model, which is itself based on country-sector-partner trade flows, is indicating short positions on the euro for most of 2015. Even if the trend continues in a linear way as it has done over the past 12 months, this suggests parity by the end of the year.



Outlook for PMIs February 2015


The Trade Corridor Indices (TCIs) measure the trade flows of any one country and forecasts these forward using its proprietorial forecasting methodology. Each index is specific to the country it relates to in that the trade corridors and flows will differ for each country. The rate of change in the index is correlated with the Purchasing Managers’ Index (PMI) for that country.

The TCIs are based on actual data and although they are highly correlated are in no sense an alternative to the PMIs since the methodologies differ. PMIs, being survey-based, are sentiment indicators while the TCIs give an actual and a forecast indication of how underlying trade conditions, including trade finance, are moving. In other words, the TCIs provide a predictable and quantifiable view of how changes in the global economy are affecting trade at an individual country level.

Generally we are expecting manufacturing PMIs to move in line with consensus this month with very little movement on their December values. The only exception is French services where we are expecting a bigger increase in the service sector PMI compared to consensus. However, although the accuracy of the predictions has been reasonable over the past 12 months, the correlation is substantially lower.

The predictions are based on:

  • The correlation of a country’s top 500 trade corridors with that country’s Manufacturing PMI to create a trade corridor index associated with the PMIs/sentiment (TCI-S)
  • Correlation of the rate of change in that index (6 month moving average) with the Manufacturing PMI
  • The monthly change in the six-month moving average (positive change suggests PMIs will improve while negative suggests they will deteriorate).

Outlook for PMIs February 2015  |  Outlook risk

  • The above information is based on the PMI tickers as listed.
  • The predictive capacity of the model is strong, but not perfect as they are based on correlations rather than causal relationships
  • Note – the correlations and values given are against the Tickers listed and not with the Flash PMIs although the Flash PMIs follow similar patterns
  • Note – forecast values are indicative of scale of change only and should not be seen as absolute values



Figure 5  |  PMI outlook, February 2015
Source  |  Delta Economics



Trade Corridor Index Asset Price Calls



The Delta Economics TCI-based asset management strategy takes the top 500 trade corridors (trade between two countries by sector) against and asset price. It creates an optimum corridor index of those trade corridors each month and has been tracking its performance over the past 19 months. This is a systematic model and assets are included in the portfolio if one of the following conditions is met:

  • The signal strength, which measures the percentage of trade corridors that are pointing to a long or short call: this must be higher than 95%
  • The signal strength is greater than 85% and the Information Ratio (which measures the performance of that optimum corridor relative to benchmark returns) is greater than 0.5 (indicating good or very good back-tested performance)
  • Where there is a signal strength of 100 and only one corridor in the index, the Information Ratio must be above 0.5.

The returns, which are not optimised and based purely on an equally weighted portfolio strategy, were 2.2% in December 2014. This means that over the past 19 months, returns have averaged 1.3% per month with above average returns in 11 months.




Figure 6  |  TCI-A returns, June 2013-January 2015
Source  |  Delta Economics


The calls for February 2015 reflect underlying volatility in markets with Information Ratios largely negative or mildly positive. Although the TCI-As across a portfolio of assets produced a return of 0.7% in October, this was against a similar backdrop of low or negative Information Ratios, which arguably underpinned the correction in the middle of the month. Because of these low, even negative, IRs our portfolio suggestions potentially have substantial downside risk attached to them.





The short call on oil reflects continuing downward pressure on oil prices despite the mild rally at the end of January 2015. While the signal strength is low, the information ratio is high suggesting that this is a strong call. Similarly, the long call on Gold has weak information ratio but strong signal strength suggesting that Gold may continue its upward path as a hedge against deflation. Because of underlying uncertainties in the global economy and the fragility of commodity markets, the long calls on copper and steel appear contrary to market sentiment currently. However, our trade outlook for the world in 2015 is mildly more positive than it was during 2014 and Asia in particular is forecast to grow strongly. A long call on copper and steel suggests prices may start to increase during February as a lead indicator of manufacturing activity increases towards the end of Q1 2015.




Figure 7  |  Delta Economics TCI-A based strategy, commodity calls for February 2015
Source  |  Delta Economics analysis





We are expecting all equity markets to increase this month, but the signal strengths are weak and the Information Ratios largely negative. A long position arguably reflects the sustained flight to equities following European QE, but the negative information ratios reflect volatility and substantial downside risk.




Figure 8  |  Delta Economics TCI-A based strategy, equity calls for February 2015
Source  |  Delta Economics analysis






The calls generally suggest that the euro will continue its weaker path against the US dollar this month. The information ratio on this call is strong, but the signal strength relatively weak. Other emerging market currencies similarly paint a picture of a strengthening dollar as expectations of an increase in US interest rates later this year versus perceived weakness in Europe and Japan continue to stoke up its value.




Figure 9  |  Delta Economics TCI-A based strategy, equity calls for February 2015
Source  |  Delta Economics analysis



Delta Economics Trade Insight February 2015  |  Author  |  Rebecca Harding  |  CEO Delta Economics


Total Trade growth in 2015



Figure 1 |  Global and Regional Trade growth in 2014 and expected growth in 2015
Source  |  DeltaMetrics, November 2014


Delta Economics is keeping modest estimates for total trade growth this year, with world trade expected to increase from 1.25% in 2014 to a minimally higher 1.94% in 2015. This is a result of slight a slowing of trade growth in Latin America and MENA (Figure 1) which is the result of geo-political tensions and economics uncertainly, amongst other things.

Tumbling oil prices combined with impending recession in Russia are creating a particularly prickly environment for trade in Europe, which struggled to pick up momentum throughout 2014 due to economic turbulence and low consumer demand in the Eurozone. Importantly, this year, Delta expects a decline in European trade from 0.27% in 2014 to -3.36%. A major contributing factor to this is lower levels of trade in major European economies such as Germany, whose trade is expected to decline by -5.23% over the year. Levels of German exports are set to fall considerably as demand from some of its major partners declines. Russia, for example, is expected to import 5% less from Germany as its economy responds to the falling value of the Ruble and weak oil prices. Other European countries, such as Austria, France and Italy, who have large corporations that trade heavily with Russia are also expected to see exports suffer as a consequence of the countries troubles.

Delta Economics is considerable more optimistic about trade in Asia than any other region, with forecasts suggesting that trade growth will increase from 5.62% in 2014, to 6.45% in 2015. This being the case, Asia will be the main contributor to the expected growth in World trade this year. Non-crude oil will remain the largest export sector, with growth of this commodity expected at around 7.6% this year. Asian trade growth will also be driven by a significant increase in exports of Gold, which is expected to increase by 15%.

As China continues to transition from an export-led economy to one that is primarily demand and domestic consumption-driven, 2015 will also be an opportunity for Asian countries to grow as global trading hubs. There is evidence of this in our forecast. Indian total trade, for example, is expected to increase by a substantial 14.25% this year. Intra-regional trade will have some bearing on this, with exports to Indonesia, Bangladesh and Vietnam to increase by over 17% each in 2015. Extra regional trade, particularly to the MENA region will also be a critical factor, with exports to the UAE, Saudi Arabia, Israel and Iran expected to increase by over 15%.


Total Trade growth in 2015  |  Author  |  Nayani Bandara  |  Analyst and Project Manager

Oil spill-overs

Why Iran’s role in the Iraq crisis is critical for everyone  |  Oil prices have climbed this month amid uncertainty about Iraq’s security as ISIS took control of Iraq’s second city, Mosul, and threatened to establish a Caliphate across Northern Iraq and Greater Syria. The region is oil-rich and the dangers of spillover into other countries in the region potentially puts further upward pressure on oil prices just as the crisis in Ukraine was beginning to be priced into markets generally and oil markets in particular.

Against this backdrop, the consequences of Iran’s decision to mobilise troops to fight against ISIS, thereby supporting the Iraqi government and, by implication the US. This clearly presents diplomatic and security challenges to the US: it does not support Iran’s backing of Syria’s Bashar al-Assad and the idea of the US and Iran being on the same side may be unpalatable to the White House.

Nevertheless, the Iranian move is shrewd. It supports Iraq’s Shiite government as a regional strategic partner and, wanting sanctions to be lifted as it does, is moving to protect its economic and trade interests as much as its political ones. The Delta Economics Q2 2014 forecast for trade growth in the MENA region generally is just over 0.6% lower than our forecast in Q1 at 4.5% growth during the course of the year. But Iran’s total trade will grow by nearly 5.5% and its exports of mineral fuels by over 17%. it clearly has a lot to gain from closer relations with both Iraq and with the rest of the world.



Figure 1  |  Oil Spillovers: Why Iran is increasingly important to the Middle East’s oil supply
Source  |  DeltaMetrics 2014


Asia is important as an export destination for Iranian mineral fuels, explained at least in part by the fact that sanctions have prevented substantial trade with Europe or North America historically. As a result, the country to watch is Turkey – simply because oil exports into Germany are routed through Turkey from Iran. Iran is Turkey’s largest crude oil importer.

From an Iranian perspective, however there is potentially a stabilising effect on oil markets that its decision to intervene in the crisis could have. If Iraq’s oil increasingly comes on tap, then any drop in oil supply from Iraq can be offset against increased supply from Iran. Figures 2 and 3 show how mineral fuel exports from both countries are predicted to perform to the end of 2014.

Figure 2 suggests that mineral fuel exports picked up sharply in the early part of 2014 but may suffer slightly from the fall-out of the current crisis in June and July, after then they will remain relatively static to the end of the year.



Figure 2  |  USDm value of Iraq’s mineral fuel exports, June 2001-Dec 2014
Source  |  DeltaMetrics 2014


Figure 3 shows that Iran’s mineral fuel exports will actually follow a similar pattern to Iraqi exports and fall slightly towards the end of Q2 and into Q3 picking up only slightly in Q4. Mineral fuel exports to Turkey have been declining fairly systematically since the beginning of 2013 which potentially reflects the fact that Turkey has supported Syrian opposition rather than Al-Assad in Syria.



Figure 3  |  USDm value of Iran’s mineral fuel exports, June 2001-Dec 2014
Source  |  DeltaMetrics 2014


Interestingly, however, this does not appear to have affected Germany’s imports from Iran which have increased since mid-way through 2012, despite the fact that sanctions still exist, reflecting, perhaps, Germany’s (and Europe’s) sustained concern about its energy security.

Crises in the Middle East always make markets nervous. Unsurprisingly the correlation with oil prices of MENA trade is very high at 0.98 since a higher value of oil trade historically also reflects higher oil prices. However, the correlation of MENA’s trade with key markets is very high: with the S&P 0.70, with Dax, 0.81, with the India BSE 0.91 and with the KOSPI, 0.92. If oil trade in the Middle East is weak, it makes both oil and equity markets nervous.

Remarkably, there is also a very strong correlation between Middle East mineral fuel exports with the Gold Spot last price monthly, as Figure 4 shows.


Figure 4  |  USDm value of Middle East mineral fuel exports versus NYSE Arca Gold Spot last price monthly, June 2001- May 2014
Source  |  DeltaMetrics 2014, Bloomberg


This correlation is very marked up to the middle of 2012 but has looked increasingly negative since then. Gold is often used as a hedge against price changes but while prices rose over this period in emerging markets, they declined in Europe breaking the relationship. In spite of that, the correlation over the whole period is over 0.90: if Middle Eastern oil trade goes up, then it means that oil wealth is increasing and that demand for gold, as a result, will be higher. If oil exports increase towards the end of the year, we can expect higher gold prices then but in the immediate future, further price declines.

The Middle East is increasingly a source of oil for Europe as it attempts to reduce its dependency on Russian oil. Yet as the region is fraught with geopolitical risks, there are dangers to the speed at which trade growth will increase, especially if the Iraq crisis spills over across the region. The major beneficiary nation, however, will be Iran whose mineral fuel trade is forecast to grow the fastest of any country in the region. This is the results of loosening sanctions and the desire, especially in Europe to have a broader energy supply base.

But it is also arguably the result of Iran’s policy to create a Shiite power-base within the region. While in the short term this may stabilize markets: pushing oil prices down as more oil becomes available during the course of the year. It might be that the effect is to increase the likelihood of a bull run next month because markets again price all the effects of the crisis in. However, the division of the region on religious grounds is also visible through its trade making it vulnerable and volatile. This may well have longer term spill-over effects.



Delta Economics is forecasting that world merchandise trade will grow by just over 1% in 2014. This is lower than its previous forecast, released in December 2013 of 1.7% and substantially lower than the World Trade Organisation’s forecast of 4.5% world trade growth for 2014. While at a country level, there are some positive growth stories, trade in 2014 is likely to be lower than trade in 2013 and this is dampening our global growth forecast.

The lower global forecast also reflects several things:

  • The effects of geo-political crises (specifically Russia’s annexation of the Ukraine which has created market uncertainty and raised the threat of sanctions, higher oil prices and slower economic growth because of constrained investment.
  • The effects of deflationary pressures in Europe and Asia which have already evident in the nominal values of trade for 2012 and 2013.
  • Lower actual trade growth in 2013 than was anticipated.
  • Forecast South-South trade growth of 5% during 2014

Russia, Ukraine & Oil Prices

Why Crimea will be an economic flashpoint | Will the Crimean crisis have an enduring effect on oil prices? Europe teeters on the brink of a crisis that could, at best re-draw the post-Cold War borders between a Russian aligned Crimea and eastern Ukraine and a European aligned western Ukraine and, at worst, re-open the East-West fault-lines of the Cold War. Underlying the global geo-political tensions that are a consequence of the current stand-off is an equally pervasive and persistent tension between Russia and the Ukraine around oil and gas supply. Since 2006 Russia has interrupted its supply of oil and gas into the Ukraine in response to political and economic disputes (specifically non-payment by the Ukraine of its bills for gas supply). In January 2009 this caused a complete shut-down of oil and gas supplies by Russia to the Ukraine for thirteen days. Memories still linger and there will undoubtedly be nervousness in markets now as European energy security threatens to coincide with broader political instability.

It is easy to see why Russia is keen to retain its influence. Despite the fact that the country’s economy is bankrupt, it is the largest ex-Soviet destination of Russian oil and gas exports. Over 50% of its imports of oil and gas are from Russia and are worth over USD 6.7bn to Russia. Assuming other things are equal and that conflict is abated, growth rates in natural gas alone, are forecast to be higher than 16% in 2014 on their 2013 value.


Figure 1 | Russian exports of Natural Gas to former Soviet States and forecast growth

Source DeltaMetrics 2014

Yet Ukraine supplies oil and gas in its own right, recently entering into agreements for shale gas exploration and production. Similarly, European countries, concerned about the impact of the 2009 crisis and their dependency on Russian supply through the Ukraine, have sought energy supplies directly from the Ukraine or from elsewhere. This reduces Russia’s influence on the Ukraine, even Europe, through gas supply in particular and it is arguably for this reason that Vladimir Putin will be keen to keep Ukraine within his control.

The effect on oil prices of all this is ambiguous and this is shown in Figure 2 which shows Ukrainian exports and imports of oil and gas against the oil spot price. Exports of oil and gas from the Ukraine track the oil price closely – price rises mean increases in exports and vice versa.


Figure 2 | Ukraine’s Oil and Gas trade against the Oil Spot Last Price Monthly, June 2006-January 2014

Source DeltaMetrics 2014


Two things are clear from this chart.

First, there is a sharp increase in Ukrainian exports following the shutdown of Russia’s gas supplies in January 2009 that starts in May 2009. The increase is sharper than it was for Russia and continued until the beginning of the second quarter of 2011. Since then, Ukrainian exports have fallen: trade growth generally across all sectors has slowed following rapid catch up in 2010 from the financial crisis and oil and gas from these two countries were no exception. But equally, this drop for the Ukraine corresponds with the run up to and opening of the Nord Stream gas pipeline taking natural gas from Russia directly to Europe.

But second, since that point, trade has been relatively flat, indeed on a downward trend in both countries. Ukrainian exports have also been more volatile but until Q3 2012 moved in the same direction as oil prices. In other words, more was supplied as prices rose. Since then, oil prices and Ukrainian exports have periodically been inversely correlated with each other: that is, increases in price have been accompanied by lower exports from the Ukraine.

There is more to this than simply the breakdown of a relationship between two things in the wake of the financial crisis. Figure 3 shows Russian oil and gas exports to the Ukraine only from 2001 to 2014 against the NYSE Oil Spot Last Price Monthly over the same period.


Figure 3 | Russian exports of Oil and Gas to the Ukraine versus NYSE Arca Oil Spot, Last Price Monthly, June 2001-January 2014

Source | DeltaMetrics 2014

The turning point is even clearer in Figure 3. From September 2011, Russian exports to the Ukraine appear to have moved inversely to the oil price as both Russia and the Ukraine began to use different supply routes and corridors to export their oil and gas. At the launch of the Nord Stream pipeline, around Ukraine, Vladimir Putin was clear about what this meant: “Any transit country has always the temptation to take advantage of its transit status,” he said. “That exclusivity is now disappearing.”

What does this suggest the outcome of the current crisis is likely to do to oil prices?

Much will depend on whether or not Russia gets its way and increases its influence in the Crimea and into the Ukraine quickly. If it does, then we can expect the risks to oil supply from the Ukraine itself and into the Ukraine from Russia to be short-lived meaning that oil prices will not be affected. However, Russia is unlikely to extend its influence into Western Ukraine without deepening instability and while it does not, we can expect Russia to restrict its supplies of oil and gas accordingly. This will put upwards pressure during 2014 on oil prices, not just because of the clear inverse relationship that appears to have developed but also because of the threat to energy security that it poses.

And in the very short term, March 2014 in particular, there is almost an inevitability about increased oil prices as markets absorb the likely effects of geo-political insecurity on energy prices and, hence, the prospects for economic recovery. How long this upward pressure persists depends on how quickly and effectively the crisis can be resolved.