By now, 2014 can easily be called the year of geo-political tension. First, Russia’s invasion into the Ukraine territory and now the possibility of a civil war in Iraq has taken a toll on global stock markets.
Surprisingly, both have a lot to do with global oil prices as those regions are oil rich. As a result, disruption in supplies or any such odds push up oil prices (read: 3 Oil ETFs Stand Out on Russian Tensions).
What is happening in Iraq?
The Iraqi rebellion is being led by Sunni Islamist militants. The root of the issue dates back to 2003 but the violence resurfaced since the removal of U.S. troops from Iraq in 2011 leading to clashes against the central government.
Al Qaeda-style militants – forming the Islamic State of Iraq and Syria, or ISIS, – have captured important cities in northern Iraq and could even try to seize the capital, Baghdad. Their aim is to set up a Sunni state in Iraq and Syria.
Of late, the worsening situation signaled the apprehension of the fragmentation of the Middle Eastern nation into three independent governed territories – the Kurds in the north, the incumbent Maliki-led Shiite government in the south, and the new extreme Sunni insurgents-led growing pocket in the center.
Impact on Oil Prices
Notably, Iraq is the second-largest crude producer in OPEC nations and fifth largest in the world, behind Venezuela, Saudi Arabia, Canada and Iran. Output in Iraq rose to as much as 3.4 million in February, the highest level in more than a decade. Per the International Energy Agency, Iraq is expected to account for 60% of OPEC growth for the remainder of this decade indicating how important Iraqi oil output is to the world.
With the militants having invaded the 310,000 barrel-a-day Baji oil refinery and Mosul, the country’s second-largest city, the possibility of some more seizure of oil fields cannot be ruled out.
The Islamic State in Iraq and the Levant, known as ISIL, has already stopped repair works in the pipeline from the Kirkuk oil field to Turkey, per Bloomberg. Hence, the threat for supply disruption spiked oil prices.
Supply scenario in other destinations has also been muted thanks to the violence in South Sudan, sabotage on Nigerian oil pipeline, a curb in production in the African nation of Libya and output lost in international ban on Iran oil since 2011 which got clearance only last November (read: Oil ETFs in Focus on Iran Deal).
The international gauge climbed over $114 a barrel on June 13 for the first time since October. Bloomberg notified that Wall Street analysts projected that Brent Crude price will likely hit the $116-a-barrel mark by the end of the year.
How to Play?
Given this situation, investors may want to consider a closer look at oil investments. While investing in oil futures is certainly an option, investors can also tap into this trend by purchasing ETFs that have exposure to oil futures. The following ETFs should thus be closely watched if the violence escalates and threatens the flow of Iraqi oil supplies in the near term (see: all the Energy ETFs here):
ETFs tracking oil futures United States Brent Oil Fund (BNO), United States Oil Fund (USO), PowerShares DB Oil Fund (DBO) and iPath S&P GSCI Crude Oil Index ETN (OIL) gained 3.31%, 3.06%, 2.40% and 3.21% over the last five days (as of June 13).
Is the Situation that Alarming?
Probably, the situation has not yet reached a delirious height. Southern zone of Iraq, which is the base of 75% of Iraq’s crude production, is still unscathed, as per the U.S. Energy Information Administration. Shiite population rules this area as opposed to Sunni militants.
Southern Iraq is also the origination point of major export terminals leading to no immediate cause for supply crunch. If the upheaval spreads into the Southern part, real worries might be spurred, especially given the output concerns in many other OPEC nations, per a Goldman analyst.
On the other hand, U.S. shale-oil boom will tend to keep much of the Iraqi shock under control. With U.S. oil output climbing from 8.3 million barrels per day in 2006 to 12.3 million in 2013, oil prices are not likely to skyrocket in the near term.
In a nutshell, though the situation has so far been quite reactive to safe haven assets and the all-important commodity of oil, it is still under control. Global powers are still in the wait-and-see mode.
In any case, by now the world is at ease with the Middle-East crisis which pops up every now and then (read: Safe Haven ETFs Slide as Syrian Tensions Cool). Still, investors seeking to take part in the recent rally in oil futures might take part in the afore-mentioned exchange-traded products as these could definitely benefit from further tensions.
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