Oil markets would be unsettled for weeks to come as oil prices were boosted to more than two-year highs by tensions over an independence vote in Iraqi Kurdistan.
Despite objections from the central government in Baghdad and much of the international community, the semiautonomous Kurdish region in Iraq’s northeast went ahead with the referendum on Monday. In a provocative step that could spark clashes and choke off oil supplies, Kurdish leaders have been given a mandate to start negotiations with Iraq even the vote is non-binding.
The region’s neighbors in Turkey and Iran, which both have large Kurdish populations, have been rattled along with Baghdad by the move. Kurds have long sought to carve out an independent state in the region.
“What [the Kurds] are bracing for is either more bluster or some short-term punitive measures.”-Bilal Wahab, Washington Institute for Near East Policy fellow
a pipeline that transports about 500,000 barrels of oil per day from Iraqi Kurdistan to Ceyhan, Turkey, was threatened to be shut down by Turkish President Recep Tayyip Erdogan following the referendum.
“The saber-rattling from Erdogan really spooked the market,” said John Kilduff, founding partner at energy hedge fund Again Capital. “This is the first time we’ve seen oil threatened as a diplomatic weapon for a while.”
As Kurds went to the polls, hitting a 26-month high of $59.49 early on Tuesday, brent crude prices surged 3 percent on Monday. U.S. crude topped out at a five-month peak of $52.43. Kilduff said that as traders took profits and concern around the referendum eased, prices fell on Tuesday.
Ayham Kamel, head of Middle East and North Africa practice at Eurasia Group, a risk consultancy, said the region is likely to see a cycle of escalation before tensions ease.
The Iraqi government ruled out talks on a Kurdish exit and has asked oil traders to stop dealing with the Kurds directly. Turkey is threatening sanctions and Iran closed its border and halted flights to the Kurdish region.
Kamel said that stoking economic crisis and ethnic violence is what all parties are weary about.
“The most likely outcome is not going to be a permanent shutdown of the Kirkuk-Ceyhan pipeline because that would completely shut down the Kurdish economy and undermine the stability of the region, which is not a primary target of either Baghdad, Ankara or even Tehran,” he said.
Bilal Wahab, a fellow at the Washington Institute for Near East Policy said that severe economic sanctions would hurt all sides because Iraqi Kurdistan has built positive, bilateral relations with its neighbors.
Wahab notes that funding trips to Istanbul by Kurdish tourists, paying Turkish construction firms to develop its cities and buying food from Iran and Turkey is done by the Kurds from the revenue that is generated by Kurdish oil. One of the biggest players in Iraqi Kurdistan is the Anglo-Turkish oil company Genel Energy is one of the biggest players in Iraqi Kurdistan.
“What [the Kurds] are bracing for is either more bluster or some short-term punitive measures,” Wahab said.
According to Helima Croft, global head of commodity strategy at RBC Capital Markets, Russia’s growing influence in Iraqi Kurdistan could also moderate Turkey’s response. Plowing as much as $4 billion into the region in just under a year, Russian oil giant Rosneft has quietly become the biggest investor in the Kurrdish oil and gas industry.
“It becomes a situation where it’s not just taking on Barzani. It’s potentially taking on Vladimir Putin,” Croft said.
(Adapted from CNBC)