Oil prices spiked yesterday on fears that the conflict in Georgia could threaten supplies and cut off a major pipeline to Europe.
At one point, crude oil rose by $1.81 to $115.41 in London trading, before falling back to its earlier price of $114.32.
The short-lived rally came as Russia continued its offensive against Georgia, a country that is a vital link in the supply route for oil from the Caspian Sea and central Asia to Europe.
Georgia claimed that Russia was purposely attacking the Baku-Supsa pipeline, which bypasses the former Soviet giant, in a bid to make Europe more reliant on Russian oil routes, although BP – which owns 30 per cent of the pipeline – denied this.
It was the second setback for non Russian oil routes in the region, after a blast in eastern Turkey last week put the Baku-Tbilisi-Ceyhan pipeline of action. Kurdish separatists have claimed responsibility for the fire, although BP says the cause is still under investigation.
According to a spokesman for BP, oil is still running through Georgia, although it is being stockpiled in the coastal town of Supsa as the conflict is preventing ships from leaving or entering the port.
James Smithies, analyst at IIR Group, said: “The military escalation between Russia and Georgia could see oil companies’ margins constrained if they are forced to source oil through Russian pipelines,”
Analyst Views: What does the conflict in Georgia mean for British oil farms?
Howard Wheeldon (BGC Brokers): “The sentiment from Russia is not good, although it won’t affect the UK yet. There’s at least a fortnight’s stockpile, although clearly the escalation by Russia of the whole conflict is bound to have an effect. Nor will it do much for UK-Russia diplomatic relations, which have all but broken down.”
Jason Kenny (ING): “It’s only really BP that’s exposed via this pipeline. It’s a bit of an unknown really and anything that threatens supply is likely to be a problem. Obviously, a pipeline running through the middle of a warzone is going to be an issue, although it’s difficult to say what the risk is. I don’t think it’s high.”
Mathew Clements (Jane’s): “The current conflict faces a real risk of escalation and expansion, most prominently in Abkhazia where the likelihood of an operation to clear Georgian forces from the Kodori Gorge appears increasingly likely and could elicit a military response by Georgian forces deployed to the south of Ossetia.”