Geopolitical risks began to affect the pricing again. The recent developments in Iraq overtook the macro data coming from the United States and the negative interest rates of Europe.
The striking incidents that took place earlier in the week related to the invasion of Mosul by the illegal extremist organisation ISIS (Islamic State in Iraq and Syria) are ongoing. Let’s try to understand the flow of events that involves Turkey closely, which resulted in the increase of oil prices and a sales wave in global markets, with 5 basic questions:
1- What is going on?
The news coming from Iraq on the 10th of June announced that Mosul was under the control of an illegal armed organisation, Islamic State, in Iraq and Syria. 10 thousands of Mosul residents took refuge in Kurdish regions and more than 30 truck drivers and Turkish diplomats working in the Mosul Consulate of Turkey were taken as hostages by ISIS militants. Vice President of Iraq, Nouri Al-Maliki, called for a state of emergency. The United Nations has asked for support from the European Union and Arab Union. The Turkish Government began negotiations for the rescue of hostages.
The truck drivers are set free however they have not been handed back to Turkey yet. The diplomats still remain as hostages. The negotiations in Ankara continue. The politicians still claim “we will receive the good news soon”. There is no military intervention from Turkey or the West in Iraq.
2- Why is Iraq important?
Iraq is important for global markets due to its oil. An important share of oil production of up to 60% takes place in Iraq. The recent figures indicate an estimate of 3.6 million barrels of daily production. The source of production and the oil fields are mainly based in the south and in Iraq’s Kurdish area, and also in the north and the central region.
The illegal ISIS organisation has seized Mosul and some of the regions with oil fields.
As a result, the oil is under threat.
3- Who is ISIS?
My guest in Akıllı Para, the journalist that follows the region closely and also the Chief Editor of Kirkuk’s Voice Newspaper, Güngör Yavuzaslan thinks that if ISIS is not stopped then it can create a great threat. Yavuzarslan states the following:
“ISIS was founded in 2004 as the Iraqi division of Al-Qaeda. It is known to be led by an Iraqi named Omar Baghdadi. ISIS has several groups under its roof including insurgents during the American invasion. Following the Syria incidents, they founded Al-Nusra Front together with Al-Qaeda. The group is mainly Sunni. The Sunnis support it and clans that were ignored due to the Shiite focused Bagdad administration. They have an Islamist discourse. They declare Sharia Law wherever they go. They practice their own laws. They use harsh methods when implementing. They also have an international structure including Chechens, Middle Eastern Arabs, and even Turkey has people in line with their thoughts. They are constantly in battle. Reaching Baghdad through Samara and the petrol region in Syria, Rakka, are among ISIS’ aims. Their final aim is to gain access to the Mediterranean.”
Following its capture of Mosul, ISIS also seized one of the branches of the Central Bank of Iraq. In other words, they have a budget. According to the Arab sources, we are speaking of 420 Million US Dollars. Yavuzarslan states “If ISIS is not stopped, we will have to be dealing with a group we once labeled as terrorists, similar to the Afghanistan based Taliban.”
4- How would ISIS affect Turkey?
Iraq is an important business partner for Turkey. It is know that there are almost 2000 small to large-scale Turkish companies doing business in Iraq. These include well-known companies such as Enka, Arçelik and Ülker. The business activities of Turkish companies vary from construction to food production. Furthermore, Iraq is the second largest market for export. It is concerned that the chaos in Iraq may result in the interruption of trade.
On the other hand, we have very important energy collaborations with Iraq. For instance, we are transporting 2.5 million barrels of oil, working with the regional administration. We sell some of this and we use some.
Furthermore, we have historical, cultural and humanistic bonds with Iraq. Güngör Yavuzaslan says “Iraq is not like Syria. Iraq would affect us much more”.
5- How do the financial markets price this?
Together with the concerns that the petrol situation in Iraq would negatively affect the demand for petrol, the rising petrol led to its peak in the last 9 months. Brent-type oil price per barrel has gone up to 113,27 US Dollars and reach its highest since September 2013. American crude oil barrel prices also reached its peak of 106.71 US Dollars since September 2013.
Europe stock exchanges have closed the week with buyers. Wall Street has given a break to the rally that has been ongoing. Istanbul Stock Exchange market had days of loss of up to almost more than 3%. It ended the week with a loss of more than 1% it lost 79,011 points. Among the developing country currencies the Turkish Lira has increased its weekly loss up to 2% against the US Dollar. The exchange rate went over 2.13. The interests have increased.
The market commentators believe that the Iraq tension will have a short-term effect in pricing. For instance, Head of International Energy Agency, Fatih Birol states that the price of Brent oil will be balanced at 110 USD if the incidents in Iraq do not spread to the south where there are rich oil fields.
There is a possibility for the situation in Iraq to get worse. In this case the cautious stance of primarily local markets and the global markets will continue. If things get worse, the exchange rate will push to 2.15 levels, the downward pressure on the stock exchange will increasingly continue. That is why we need to continue following developments in Iraq, including weekends.