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Conflict in Iraq rattles markets

Oil prices jump to 9-month high on supply concerns; Asian markets upbeat despite sell-off in US
Saturday, June 14, 2014 - 06:00
Iraq-oil-14062014.jpg
ESCALATING violence in Iraq sent ripples through financial markets yesterday, as the world nervously watched the unfolding of the worst sectarian conflict to grip the country since the 2003 US invasion - PHOTO: REUTERS

Singapore

ESCALATING violence in Iraq sent ripples through financial markets yesterday, as the world nervously watched the unfolding of the worst sectarian conflict to grip the country since the 2003 US invasion.

Oil prices jumped to a nine-month high on concerns that supplies from the second-largest Opec (Organization of the Petroleum Exporting Countries) producer could be cut, even though its main oil-producing region in the south is unaffected for now.

Brent futures recorded a session peak of US$114.69 a barrel, their highest since September.

But reactions on Asian markets were more upbeat, compared to the sell-off in the United States on Thursday night. The benchmark Straits Times Index inched up 0.24 points, or 0.01 per cent, to 3,293.25, as positive Chinese data on retail and industrial production soothed jitters over the Iraq conflict; regional markets such as Hong Kong, Shanghai and Tokyo also ended the day higher.

Earlier this week, Sunni extremists led by the Islamic State of Iraq and Syria, riding on growing Sunni discontent with the Shiite-dominated government, took over Iraq's second-biggest city, Mosul. They are now advancing towards Baghdad and two other Shiite holy cities.

Alarmed by the possibility of Sunnis growing in power, Shiite-ruled Iran has sent units to aid the Iraqi government, which is dominated by Shiites.

Meanwhile, Kurdistan's military forces, known as Peshmerga ("those who face death") have taken control of the northern oil city of Kirkuk. With Kurds making up a fifth of Iraq's 32.5 million population, the Kurdish regional government has been agitating to become an independent state.

These developments have sparked fears that Iraq is headed for a split into Shiite, Sunni and Kurdish areas.

The Financial Times quoted Feisal al-Istrabadi, Iraq's former deputy ambassador to the United Nations, as saying: "The state of Iraq is in imminent collapse."

Here at home, KPMG Singapore's head of energy and natural resources Pek Hak Bin said: "Iraq had been finally showing some signs of a turnaround in fortunes, with oil production steadily increasing to pre-war levels. It is no surprise then that many political leaders are concerned about the impact of the ongoing crisis."

The US, seen to be reluctant to directly involve itself again in Iraq, having completed the withdrawal its troops from the country only three years ago, has raised the possibility of air strikes. President Barack Obama said on Thursday that he does not rule out anything.

With oil prices up from geopolitical tensions in the Middle East, sectors that deal with oil exploration and offshore and marine could benefit, said CIMB research head Kenneth Ng.

Oil-and-gas exploration firm RH PetroGas was a clear winner on the stock market yesterday, ending 5.5 cents or 6.1 per cent higher at 95.5 cents amid heavy trading.

Higher oil prices would, however, hurt transport stocks, with higher costs eventually crimping corporate margins across the economy, said Mr Ng.

The conflict has come during a tight global oil market, given the outages and geopolitical conflicts that have already erupted in several oil-producing regions this year.

With the world's oil market now in equilibrium with about 90 million barrels a day of production and consumption, "there is little room for manoeuvre", said KPMG's Mr Pek.

For now, fighting in the north of Iraq should not have much of an impact on current oil production or exports, since most of its oil production and all its export facilities are based in the south, said commodities economist Tom Pugh at macroeconomics research firm Capital Economics.

Iraq now produces about 3.5 million barrels per day (bpd), making up 4 per cent of the global oil supply.

Mr Pugh said: "The most significant impact from the insurgency is likely to be the disruption to Iraq's already ambitious targets for oil production over the medium to longer term."

The government has announced plans to boost output to four million bpd by the end of this year, and to seven million bpd by 2016, with most of this growth to come from the underdeveloped northern and Kurdish areas, which have large amounts of untapped, easily accessible oil.

The ongoing conflict is likely to make it "largely impossible" to develop these, said Mr Pugh.

If the insurgents were to attack Baghdad, Brent futures could climb to US$125 a barrel, estimated CMC Markets' chief strategist in Sydney.

Bloomberg reported him as having said: "The market got concerned about potential disruption in Libya; Iraq is a much more serious situation."

Besides the insurgents taking control of the oil-producing region in south Iraq, there are also concerns that an escalation of the situation into the Persian Gulf could affect tanker travel through the Strait of Hormuz.

"When this happens, the world's supply and demand balance will fall out of sync," said Mr Pek of KPMG. "There will surely be an impact on prices, as there is very little swing capacity outside of Saudi Arabia."

In the days ahead, observers will be closely watching not only the insurgents threatening Baghdad, but also forces operated by the Kurdish powers, the Iranian authorities and the US.

Mr Pek said: "As the world looks westwards for leadership in this current crisis, one thing is for sure: The situation in Iraq may escalate very rapidly, and if it does, the impact will certainly be global."

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