Global markets' sanguine reaction to the insurgency in Iraq looks complacent. The recent intensification of fighting has nudged crude oil prices to a nine-month high while stock and bond markets have barely moved. That overlooks the stagflationary risks.
Brent crude hovered above $113 per barrel on June 18 amid reports that insurgents had targeted the Baiji oil refinery in the north, the largest in Iraq. The fear is of sustained high prices, or even a spike to the $140 per barrel levels that assailed the global economy in 2008.
The risks are there because Iraqi supply matters. With Libyan exports currently reduced to minimal levels, the International Energy Agency is expecting increased Iraqi oil output to supply 60 percent of the overall rise in OPEC output for most of the rest of the decade. Most of Iraq’s infrastructure is in the south of the country and still far from the current fighting. Last week, the IEA suggested the threat to oil output remains small for now.
Markets nonetheless have cause to be uneasy. The roughly 3 percent rise in the oil price that has occurred this month is already bad for a less-than-robust global economy, and has proved a shock for India. The rupee has fallen to a two-month low, putting pressure on the central bank to intervene. Inflation in India is already a high 6 percent. With the government providing subsidies on diesel and cooking fuel, a rising oil price worsens its budgetary position.
The global economy stands to suffer from even a small increase in the oil price if any rise is sustained. In China, every $10 increase in the crude oil price will reduce growth by 0.2 percentage points, Barclays estimates.
Then there is the global inflationary impact of pricier oil. In the United States, consumer price inflation has risen to 2.1 percent and investors are already watching for a change in the stance of the Federal Reserve. A more hawkish shift would tend to push up U.S. rates and the dollar. That would worry equity investors and weaken sentiment on emerging economies. Yet right now, markets are priced for little to go wrong.
Source: Reuters
Brent crude hovered above $113 per barrel on June 18 amid reports that insurgents had targeted the Baiji oil refinery in the north, the largest in Iraq. The fear is of sustained high prices, or even a spike to the $140 per barrel levels that assailed the global economy in 2008.
The risks are there because Iraqi supply matters. With Libyan exports currently reduced to minimal levels, the International Energy Agency is expecting increased Iraqi oil output to supply 60 percent of the overall rise in OPEC output for most of the rest of the decade. Most of Iraq’s infrastructure is in the south of the country and still far from the current fighting. Last week, the IEA suggested the threat to oil output remains small for now.
Markets nonetheless have cause to be uneasy. The roughly 3 percent rise in the oil price that has occurred this month is already bad for a less-than-robust global economy, and has proved a shock for India. The rupee has fallen to a two-month low, putting pressure on the central bank to intervene. Inflation in India is already a high 6 percent. With the government providing subsidies on diesel and cooking fuel, a rising oil price worsens its budgetary position.
The global economy stands to suffer from even a small increase in the oil price if any rise is sustained. In China, every $10 increase in the crude oil price will reduce growth by 0.2 percentage points, Barclays estimates.
Then there is the global inflationary impact of pricier oil. In the United States, consumer price inflation has risen to 2.1 percent and investors are already watching for a change in the stance of the Federal Reserve. A more hawkish shift would tend to push up U.S. rates and the dollar. That would worry equity investors and weaken sentiment on emerging economies. Yet right now, markets are priced for little to go wrong.
Source: Reuters
