Oil markets have had a volatile week trying to assess the likely impact of the tensions in the Gulf. Iraq's initial movement of troops towards the border area with Kuwait sent crude prices upwards on 8 October but they drifted down again as the threat of a major confrontation receded. By 12 October, the benchmark Brent crude for immediate delivery was trading in a narrow range around $16.15 a barrel. Brent had traded as high as $17.25 a barrel on 10 October before Iraq indicated that its troops would be withdrawing.

As the prospect of fighting faded, markets began to discount the impact of the crisis on oil supplies and prices. During the 1990-91 Kuwait crisis a shortfall in supplies was made up by a sharp expansion of Saudi and other OPEC production and this has proved reassuring. 'The crisis of 1990 showed that the Saudis were prepared to abandon quotas...in the event of any sudden oil supply disruptions,' Kleinwort Benson says in its latest oil market report. The report goes on to predict higher oil prices in 1995, with a Brent average of $18 a barrel, if the embargo on Iraqi oil exports is not eased.

Demand is now expected to strengthen as the world economic recovery continues and winter approaches. The latest figures from the Paris-based International Energy Agency show third quarter demand running at 67.3 million barrels a day (b/d) and supplies of 68.1 b/d. In September, world supplies are estimated to have increased by 1 million b/d while demand grew by 500,000 b/d.