Crude oil surges to 9-month high as US threatens action against Sunni militants

Escalating violence in Iraq, India’s second-biggest crude-oil supplier, and fears of a consequent supply disruption spooked the stock market on Friday. The Sensex ended 348 points down to close at 25,228 while the Nifty lost 107 points to close at 7,542.

Brent crude climbed to a nine-month high of nearly $115 a barrel, as supply disruption fears took centrestage after the US threatened military action in Iraq against Sunni Islamist militants advancing on Baghdad.

West Texas Intermediate crude headed for its biggest weekly advance since December. Futures rose 1.1 per cent in New York, extending a 2 per cent rally on Thursday, the most in two months.

On the BSE, shares of oil refiners led the crash; Indian Oil and Bharat Petroleum were down by around 5 per cent, while Hindustan Petroleum dipped 8.2 per cent.

Refiners worried

Iraq has displaced Iran, which has been hit by Western sanctions, as India’s No. 2 crude supplier.

“The political complications in Iraq are a cause of concern,” said a senior official in the Ministry of Petroleum and Natural Gas. “We are watching the situation carefully... the actual implication will be known when the impact on offtakers becomes evident,” he said.

Indian refiners such as Indian Oil Corporation, Reliance Industries and Essar Oil, which buy Iraqi crude, are watching the situation. ONGC believes that while the impact on crude pricing has been significant following the developments in Iraq, it will be a temporary phenomenon. But if crude prices continue to surge, they will send fuel subsidies flaring, and that is a big concern for the domestic companies.

The rupee, too, saw its biggest single-day fall in over four months, with oil importers scrambling to buy dollars to stock up in anticipation of a further price rise. High crude oil prices will push up the input costs of refiners and hit their gross refining margins.

A price spike will also widen the crude import bill, hurting India’s economy, as the country meets three-fourth of its energy needs through imports. Moreover, there are inflation risks and dangers of the trade deficit widening.

“There is a meltdown in global equity and due to the safe-haven demand because of problems in Iraq, the dollar is strengthening across the globe, including against the rupee,” said a dealer with a private bank.

Gold, which is favoured by investors in times of uncertainty, rose to its highest level since May 27. In the global market, gold was up at $1,273.49 an ounce. In Mumbai, gold reclaimed the ₹27,000 per 10 grams mark. Standard gold (99.5 purity) rallied by ₹350 to ₹27,205.

The escalation of violence unnerved equity investors in Europe, too, with the Stoxx 600 Europe down 0.4 per cent. Germany’s DAX and the UK’s FTSE 100 both lost 0.7 per cent, while France’s CAC-40 declined 0.6 per cent.

Collapse in Iraq

Three years after the US withdrew its forces from Iraq, the army of the Shiite-led government has abandoned positions in many areas as the militants from the Islamic State of Iraq and Syria (ISIS) advanced, threatening the stability of oil production in the north.

Implying military action against the Sunni militants, US President Barack Obama said: “I don’t rule out anything because we do have a stake in making sure that these jihadists are not getting a permanent foothold in Iraq. Or Syria, for that matter.”

The US is weighing how to respond to the gains made by ISIS, a breakaway al-Qaeda group, which poses the biggest threat to Prime Minister Nouri al-Maliki’s government since the US withdrawal. On Thursday, the Premier failed to get Parliament to decide on a state of emergency, reflecting the weakening position of his government.

With government soldiers deserting their posts, Kurdish forces have moved into Kirkuk to protect oilfields and the city. Part of the pipeline that exports crude oil from Kirkuk has fallen under the control of ISIS. The pipeline to the 310,000-barrel-a-day Baiji refinery is also now under ISIS control.

(This article was published on June 13, 2014)
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