After the failed coup, markets were quick to write off any short-term impact on oil prices. Yet, Turkey's post-coup behavior increases risks for investors.
Following last weekend's coup attempt by forces within the Turkish military against the government of President Recep Tayyip Erdogan, a new level of geopolitical complexity affects financial markets.
With mounting uncertainty surrounding who was in control of the country, it was no surprise that geopolitically-sensitive markets such as foreign exchange and commodities became an immediate focus across global financial markets after reports of the attempt on the evening of July 15.
In particular, Turkey serves as a vital intermediary in the transportation of oil. Supply disruptions stemming from geopolitical events can cause significant increases in oil prices, as market participants react to the resulting decrease in supply.
Given the extensive network of international pipelines both running and planned, the impact to oil prices can be significant from disruptions in Turkey. With routes such as Turkey's Bosphorus and Dardanelles Straits handling roughly 3% of global oil shipments, the potential for price volatility was high following news of the attempted coup.
However, oil prices were hardly affected in the days after the coup. This was due to anti-government forces only managing to close transportation routes for a handful of hours. As a result, there was little to no lasting impact on oil prices this week.
Immediately following the reports of the coup attempt, there was upward pressure on oil prices. However, the market quickly discounted the coup as a non-factor for the commodities market and a level of stability emerged for crude that has remained throughout the week.
Other oil factors in play
Across the Mediterranean to Turkey's southwest, Libya's Hariga Oil Port has been closed this week as guards there have undertaken a protest over wages.
These actions have effectively taken 100,000 barrels of oil from the Sarir oil field off the market each day. This raises questions on regional supply stability and provides further support for global oil price increases.
Countering the short-term and disruptive supply-side pressures of both Turkey and Libya, market reports this week have made several indications.
In general, some global producers are betting on a decrease in oil prices into the end of this year. This is the result of an international supply glut, which continues to put downward pressure on prices in the medium term.
Although recent geopolitical events are heightening the risks inherent in oil, it appears that markets are giving credence to this long-run view of an oversupply, supporting lower prices into year-end.
Markets after the coup clean up
More broadly speaking, overall markets are reacting negatively to the government's response to the coup attempt. This has led to the discounting of Turkish fixed income and equities products across major Turkish indices.
The Borsa İstanbul (BIST) 100, which is the main share index for Turkey, was down over 7% following the coup attempt and has continued to slide this week.
The Turkish lira has not regained its losses suffered since the start of the coup either, which fell 4.7% against the US dollar last Friday. In light of these market movements, analysts are keen to notice any ripple effects this week as fallout from the coup could have feedback effects on other emerging market economies.
Turkey's central bank cut rates again in what might be seen as an effort to portray an image of business as usual to markets following the aftermath of Friday's coup attempt. Consequently, the overnight lending rate was lowered to 8.75% from the previous 9%.
Running a current account deficit, Turkey needs sustained foreign direct investment in order to remain solvent. With heightened levels of political risk following the coup attempt, one might have thought that the bank would have held off on its rate decrease to limit potential capital flight and negative pressure on the lira.
Risk on the coup horizon
As Erdogan's government continues the process of restoring domestic order, his administration's behavior is beginning to raise a new set of questions concerning the country's leadership. These questions involve the detaining of a countless number of opposition supporters, as well as the sacking of thousands of education workers.
These actions, combined with the possible re-institution of the death penalty to deal with the political dissidents, challenge Turkey's historical claim of democracy, as well as its future place amongst international institutions.
As a NATO member and EU aspirant, Turkey is eliciting cautionary responses from global leaders as to how its government handles the aftermath of the coup attempt. These leaders warn that draconian punishments could severely harm international relations.
President Erdogan needs to be careful in claiming that the coup is an internal concern for Turkey. By responding too harshly, he may upset relationships abroad and in doing so, turn the coup from a non-event into an augury of international protest with sweeping market implications.
Similarly, President Erdogan is calling for the extradition from the US of Fethullah Gulen, founder of the Hizmet movement in Turkey. Erdogan blames Gulen for inspiring the coup and this may further upset relations with the United States.
Increased instability with the United States and its allies, such as Israel, or other international organizations such as the EU, will only exacerbate the detrimental effects that the coup has already had on the investment climate.
In the end, the coup revealed that the true question was not whether President Erdogan was in control of the country, but whether anyone else ever can be. As a cornerstone of geopolitical stability in the Middle East, markets could be the country's toughest critic in the months to come.