Oil prices have remained below $50 for a long time, but they have been going up due to increased risk of conflict as political leaders have been more harsh in challenging one another, particularly in the Middle East, where an independence referandum took place in the Kurdish Regional Government (KRG) of Iraq. Prices stood at $44 per barrel on June 21. Over in as little as three months, they rose to almost $60, climbing up by 32 percent. On Sept. 26, the price of Brent oil reached a two-year high. Turkey will undoubtedly be one of the worst affected countries by this development. The Turkish economy, which has been extending much effort to keep its massive current account deficit in check, had found some breathing room thanks to the long-term low course of oil prices. Given that energy purchases account for a considerable part of the country’s imports, the increase and the upward trend in oil prices show that yet a new challenge is ahead for the Turkish economy.
Higher oil price affects indicators negatively
Even before the hike in the price of oil, the Turkish Central Bank was struggling to keep the inflation rate below a certain level, mostly because of the continous incerase in food prices. The hike in the price of oil inevitably leads to increases in the prices of many products used in a number of industries, which means that the Central Bank’s job will be even more difficult This, in turn, translates into higher rates or higher costs on borrowing. In short, the oil price hike impacts many industries and the general macroeconomic indicators adversely. The Kurdish vote has also contributed to the rise in the price of oil, as it might put oil supply at risk. Oil prices have risen by more than 10 percent over the course of September, owing to the expectation that the demand for oil is also on the rise and OPEC producers’ curbing production in order to fend off the risk of oversupply. The Kurdish region of Iraq, a landlocked area, can export up to 700,000 barrels a day via a Turkish pipeline, which brings the product to Ceyhan Port in the Mediterranean region.
Turkish President Recep Tayyip Erdoğan threatened the shut down the pipeline, saying Turkey might “close the valves” on oil exports from the Kurdish region. Citibank Global Head of Commodities Research Ed Morse said this could lead to a market squeeze.
“That quantity of crude coming out of the supply chain would be fairly significant,” said David Lennox, an analyst at Fat Prophets in Sydney. “The price reaction might indicate that the supply situation is a little closer to balance. These types of geopolitical events tend to drag out, it could certainly help to keep prices higher for longer.”
Get ready for supply gap
Libya, Nigeria, Venezuela, Iran and Iraq — may already be pumping at their maximum capacity this year, Ed Morse, Citibank global head of commodities research, said in an interview with Bloomberg. Rather than a surge in output, there’s a risk of a market squeeze emerging as early as 2018, driven by those nations because of weaker investment in exploration and development, according to Morse.
“Fear in the market has been that OPEC production will rise dramatically,” said Morse. However, “there could be a supply gap emerging, which could point to a tighter market,” he said in Singapore on the sidelines of the S&P Global Platts APPEC Conference.
