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A surge in crude oil prices to levels not seen since the start of the Iran-Iraq war in 1980 could add unwanted inflationary pressure to the New Zealand economy and could put more pressure on the Reserve Bank to raise interest rates.
Crude oil prices have risen more than 10 per cent in six straight days of gains on speculation Iraqi exports may be disrupted if Turkey sends its forces to attack Kurdish militants operating from its southern neighbour.
Oil has climbed from below US$70 in mid-August and early this morning (NZ time) hit US$89 - just US$1 short of 1980's inflation-adjusted high of US$90.46.
The price pulled back to US$88.24 at around 6.00am (NZT).
ANZ National Bank economist Cameron Bagrie said: "It's not welcome news for the Reserve Bank because it will add to inflation pressure. And it's not welcome for households because petrol is a pretty big item of expenditure.
"When you get the combination which we've had of oil prices going up and the currency going down it spells higher prices at the pump."
The NZ dollar dropped 2c to briefly fall to below US74c for the first time in three weeks yesterday morning as currency traders responded to growing risk aversion in the US. It recovered to close at US74.76c.
If the oil price was sustained it would take money out of people's pockets which could also dampen consumer spending, Bagrie said.
But the Reserve Bank was likely to be more worried about the immediate price impact, he said.
"If you look at the broad supply and demand balance the market is still pretty tight, there is a lot of uncertainty heading into the Northern Hemisphere winter and now you've got the geopolitical risk," Bagrie said.
Only a fraction of global oil supply could be immediately threatened by a Turkish incursion into northern Iraq, but crude prices have surged on concern any conflict may escalate and disrupt the flow from the Middle East.
The effect of the dispute was magnified in oil markets as it came against a backdrop of tightening supply, said Paul Horsnell, head of commodities research at Barclays Capital.
"The price rise is part of a trend that has been going on for quite a while, of tightening balances in the oil market. Inventories are thinning, so geopolitical concern is going to get a different response to, say, a year ago when stocks were higher."
Last month, Opec pledged to deliver an extra 500,000 barrels a day starting November 1 to help meet peak northern hemisphere heating demand.
But extra output in November may not be enough to temper the market's bullish tone, said Mark Waggoner, president of Excel Futures.
"We won't see any of that oil for six weeks," he said.
"They're already ramping up a little bit and we still have record prices," he said.
"Unless we see a five million barrel crude build I don't think we're going to see this market drop," he added. "You can bank on US$90."
In the US on Tuesday night, increased credit market concerns and the surge in oil prices prompted a sell-off which saw the Dow Jones shed nearly half a per cent.
Most other world markets followed suit, although New Zealand and Australia bucked the trend staying in positive territory yesterday.
While the oil spike and US instability were not good news for local markets, there had not yet been a strong flow-on effect, said Stephen Wright at ASB Securities.
The announcement from SkyCity - that another potential buyer was likely to begin due diligence - and another strong showing from Telecom had propped the market up, he said.
The uncertainty in the US had not prompted the kind of hedge fund selling in New Zealand that had happened after the initial credit crisis in August.
- Additional reporting from Agencies
